Fitch Affirms Thailand#s PTT at #BBB+#; Outlook Stable

Stocks and Financial Services Press Releases Tuesday May 7, 2019 14:58
Bangkok--7 May--Fitch Ratings

Fitch Ratings-Bangkok/Singapore-03 May 2019: Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' and National Long-Term Rating at 'AAA(tha)'. The Outlook is Stable. A full list of rating actions follows at the end of this release.

The affirmation reflects PTT's standalone credit profile (SCP) of 'bbb+', which is at the same level as the sovereign's rating (BBB+/Stable). PTT's ratings will continue to be equalised with those of the sovereign under Fitch's Government-Related Entities (GRE) Rating Criteria if the company's SCP weakens, provided our assessment of PTT under the GRE criteria remains unchanged. PTT's SCP reflects its integrated business model and strong financial position. Upstream operations remain weak, but are likely to improve over the medium term, with low financial leverage providing headroom to address depleting reserves.

KEY RATING DRIVERS

Upstream Operations to Improve: The agreed USD2.1 billion acquisition of Murphy Oil's Malaysian upstream assets and contract wins at the Erawan and Bongkot natural gas fields in Thailand should improve the upstream operations of PTT's exploration and production arm - PTT Exploration and Production Public Company Limited (PTTEP); increasing production over the next five years from our previously expected decline. We also expect PTT's reserve profile to improve, although to still remain weak against exploration and production companies rated in the 'BBB' category.

The contracts wins have eliminated the risk to loss of production from the Bongkot project, which accounted for about 27% of upstream sales volume in 2018, and will increase PTTEP's dominance in Thailand's natural gas production. Gas production from the Erawan and Bongkot fields accounted for about 60% of gas production in Thailand in 2018.

Headroom to Support Investments: We expect PTT's financial profile to remain robust and comfortable for its rating, despite our forecast of a modest rise in leverage due to its agreed upstream assets acquisition and higher capex to support increasing production at PTTEP; FFO adjusted net leverage is likely to modestly increase to 1.3x-1.5x in 2019-2021 (2018:0.7x). In addition, PTTEP's large cash balance of USD4.0 billion at end-2018 should be more than adequate to fund the acquisition, resulting in a net cash position. PTTEP's gross debt/EBITDA was only 0.6x at end-2018.

Significant Medium-Term Capex: Fitch expects capex, on a consolidated basis, to rise in 2019 (2018: THB156 billion), driven by investments in subsidiaries. PTT has also earmarked THB188 billion of provisional capex for s-curve and new areas of business expansion, including its liquefied natural gas value chain, energy storage and smart cities segments, although it does not have tangible plans for these investments.

Integrated Model: PTT's ratings reflect its integrated business model and the stability provided to its overall risk profile from large and generally stable mid-and-downstream operations, which include gas sales and distribution, oil retailing, oil refining and petrochemicals. These operations have provided a buffer against the large earning deterioration in the upstream operations since 2H14.

Stable Cash Flow from Gas: PTT's financial profile benefits from stable cash flow from its natural gas business, which is underpinned by steady demand and long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. The profitability of its gas transmission operations and the sale of natural gas to power producers and gas-separation plants are resilient to oil and gas price fluctuations. However, the earnings of gas-separation plants and natural gas sales to industrial users are more exposed, as the cost adjustment of gas purchases, which are based on long-term contracts, lag that of product prices.

Strong Likelihood of Support: Fitch regards PTT's status, ownership and control by the sovereign as moderate. The state directly owns 51% of PTT and appoints its board. We see the support record and expectations of state support as strong. There has been no explicit tangible financial support from the state due to PTT's strong financial position, but we believe support would be forthcoming if needed in light of PTT's strategic role in Thailand's oil and gas sectors.

We believe the socio-political implications of a potential default by PTT are high, as a financial default would significantly affect gas availability in Thailand, which in turn could cut electricity generation and lower the country's energy security. We also see the financial implications of a default as strong, as it could limit the availability and cost of domestic or foreign financing options for the state and GREs.

Based on this assessment, Fitch will equalise PTT's ratings with that of the sovereign if PTT's 'bbb+' SCP weakens. We currently do not factor in any support, as PTT's SCP is at the same level as Thailand's Long-Term IDR.

DERIVATION SUMMARY

PTT's ratings reflect its integrated business model. We expect its weak upstream operational profile relative to 'BBB+' peers to improve, with the ratings supported by mid-and-downstream business diversification and large exposure to gas in the stable upstream business.

The ratings also reflect PTT's medium-sized operating scale, although it is significantly smaller than China National Petroleum Corporation (A+/Stable) and Petroliam Nasional Berhad (PETRONAS (A-/Stable), whose ratings are constrained by their sovereigns. PTT has larger operating scale, in terms of sales and EBITDA, than OMV AG (A-/Stable) and Repsol, S.A. (BBB/Positive), but a weaker reserves profile. PTT has similar credit metrics to OMV, but OMV operates in lower-risk countries. PTT has stronger credit metrics than Repsol.

KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
  • Benchmark Brent crude at USD65.0/barrel (bbl) in 2019, USD62.5/bbl in 2020, USD60.0/bbl in 2021 and USD57.5/bbl thereafter
  • Exploration and production business sales volume to increase by a 6%-8% CAGR in 2019-2023 (2018: 2%)
  • EBITDA from the gas, petrochemical and refining businesses to fall in 2019, but remain healthy
  • Capex to increase in 2019-2020 (2018: THB156 billion)
  • USD2.1 billion acquisition of Murphy's assets in Malaysia in 2019, but no other M&A
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • An upgrade of Thailand's Issuer Default Rating, provided likelihood of support remains intact.
  • We do not expect an upgrade of PTT's SCP over the next 18-24 months due to its weak upstream operations relative to peers.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • A downgrade of Thailand's ratings.
Factors that may lead to negative action on PTT's SCP include:
  • Large debt-funded investment or weaker operating cash flow, resulting in a sustained deterioration in FFO adjusted net leverage to over 2.8x (2018: 0.7x)
  • A weakening financial profile of its upstream operations (PTTEP), with FFO adjusted net leverage at above 2.5x and failure to address declining reserve life in the medium-term
  • Adverse changes to regulations, gas sales contracts or pipeline tariffs.
For the sovereign rating on Thailand, the following sensitivities were outlined by Fitch in its rating action commentary of 7 December 2018.
The main factors that could, individually or collectively, lead to a positive rating action:
  • A continuation of the recent recovery in growth without the emergence of imbalances.
  • Reduction of social and political tensions, for instance reflected by improved governance and development indicators.
The main factors that could, individually or collectively, lead to a negative rating action:
  • Renewed political disruption on a scale sufficient to have a negative impact on Thailand's economy.
  • A larger and sustained rise in Thailand's government debt ratios, for example due to a fiscal deterioration or a materialisation of contingent liabilities on the sovereign balance sheet.
LIQUIDITY

Strong Liquidity: PTT's liquidity is supported by available cash of THB398.8 billion at end-2018 against THB88.7 billion of debt maturing within 12 months. Its liquidity is also supported by solid cash flow generation and access to the debt-capital markets and bank funding. PTT's debt maturity profile remains comfortable, with an average term to maturity of 8.4 years.

FULL LIST OF RATING ACTIONS
PTT Public Company Limited