PTTEP's ratings are equalised with those of its parent, PTT Public Company Limited (PTT; BBB+/Stable), reflecting our assessment of the strong operating and strategic linkages between the two companies. We continue to assess PTTEP's Standalone Credit Profile (SCP) at 'bbb', due to its strong financial and operating profiles, which compare well with 'BBB' rated upstream peers. Headroom for PTTEP's SCP remains high, as its credit metrics are within the leverage thresholds for its SCP, even with considerable stress to our price and volume assumptions. This is due to its near zero net debt, the lower volatility of its selling prices relative to crude indices, low production costs and the stable demand for its products in Thailand. Downside risk to PTTEP's SCP is low; Fitch would consider revising PTTEP's SCP upwards if it is able to demonstrate its ability to further improve its reserve profile.
KEY RATING DRIVERS
Strong Linkages with Parent: Our assessment of strong linkages between PTTEP and its parent is in line with our Parent and Subsidiary Rating Linkage criteria and is driven by the two companies' integrated operations, as PTTEP provides the group's crucial upstream integration. PTTEP derived nearly 80% of its revenue from its parent and contributed about 45% of PTT's consolidated EBITDA in 2019.
PTTEP also plays an important part in supporting its parent's strategic role in Thailand's oil and gas sector and improving the country's security. PTT has representation on PTTEP's board and is involved in the appointment of some key management personnel. It also plays an active role in supporting PTTEP in many strategic decisions, including large acquisitions.
Lower Selling Price Volatility: PTTEP's gas sales prices are adjusted every three to 12 months and its contracts are linked to the average of crude price indices of the past six to 24 months. As a result, Fitch forecasts PTTEP's gas selling price to fall by 14% to about USD6 per million British thermal units (mmbtu) in 2020 (USD6.9/mmbtu in 2019), compared with a 46% price drop for Brent.
Fitch expects gas selling prices to dip to below USD5/mmbtu in 2021, before recovering in line with our estimates of improved crude prices. PTTEP hedged around 40% of its liquids production at USD50-55/barrel (bbl) in 2020 and we expect this to result in a derivative gain of about USD300 million. About two-thirds of its production comprises gas and one-third oil.
Marginal Volume Growth: Fitch expects 2020 volume across oil and gas to be 7% lower than PTTEP's original estimate due to the coronavirus pandemic. PTTEP initially expected volume to increase by around 11% to around 390 thousand boe per day (mboepd) in 2020, driven by key acquisitions in 2019. PTTEP sells nearly all the gas it produces in Thailand via long-term take-or-pay contracts, where historical volumes have been higher than minimum required offtake. Fitch expects PTTEP's gas sales volumes to drop to near the minimum required offtake, as its offtakers would instead prioritise the usage of currently cheaper imported liquefied natural gas (LNG).
We also do not expect much impact on PTTEP's domestic oil production volumes, as Thailand is a net importer of crude oil. Fitch expects most of its oil volume declines in 2020 to be from PTTEP's international operations. Around 80% of PTTEP's production was from Thailand in 2019, with the remainder mostly from south-east Asia. Fitch expects both oil and gas volume growth to recover and average at around 5% a year from 2021 onwards on recovering demand.
Improving Operational Profile: PTTEP's proved reserves improved to 1,140 million barrels of oil (boe) and its proved reserve life rose to 7.5 years as at end-2019 (2018: 677 million boe and 5.2 years), following its acquisitions of Partex Holding B.V's and Murphy Oil Corporation's (BB+/Negative) Malaysian upstream assets during the year. We estimate the reserve life will remain at around seven years over the next two to three years, considering its recent acquisitions and ongoing investments.
Fitch thinks PTTEP has adequate financial flexibility to maintain its reserve life at a minimum of seven years over the medium- to long-term as per its publicly stated objective. PTTEP also benefits from low cash costs of around USD16/boe in 2019. PTTEP's reserve profile is in line with 'BBB' rated upstream oil and gas producers and its breakeven oil price is comparatively strong. PTTEP's developed reserves, however, are around 60% of its proved reserves, which is somewhat weaker than that of 'BBB' peers.
Robust Financial Profile: Fitch expects PTTEP's credit metrics to remain strong for its SCP, with FFO leverage at less than 0.5x until 2024. PTTEP has significant headroom for its SCP given its strong financial profile; we believe its financial profile would remain adequate for its SCP even under our stress-case price assumptions. PTTEP has also reduced its expected capex for 2020 by 15% to 20% from its original estimates. Fitch, however, thinks PTTEP's flexibility to further reduce capex is relatively limited due to its to its mature domestic fields, which require investment to maintain production levels, in addition to domestic investment commitments.
Acquisitions Improve Diversification: Fitch thinks PTTEP is likely to remain acquisitive over the long term to meet its stated objectives of maintaining a seven-year reserve life and its target annual revenue growth of 6% until 2025. The company spent over USD3 billion in 2018 and 2019 on acquisitions, which have been credit accretive, in our opinion, as they have improved PTTEP's operating profile and diversification. Fitch does not factor in any acquisitions in its forecast.
'bbb' SCP: PTTEP compares well with Pioneer Natural Resources Co. (BBB/Stable) and Concho Resources Inc. (BBB/Stable), with a similar production scale of 330-to 340 mboepd and proved reserves of around one billion boe. PTTEP's breakeven oil price is also comparable with that of Pioneer and better than that of Concho. PTTEP's financial profile is stronger than that of both peers. The Negative Outlook on Noble Energy Inc. (BBB/Negative) reflects its reduced exploration and development activity amid lower oil prices, which could result in production declines. Noble's proved reserves are higher, at around 1.9 billion boe, and its production scale is comparable with that of PTTEP, at 361 mboepd as at 2019. Noble, however, has lower unit profitability than PTTEP and its credit metrics are weaker. PTTEP has higher exposure to gas sales than its US peers; the domestic gas sale contracts provide a volume floor and result in lower price volatility for PTTEP given the pricing structure. PTTEP's proved developed reserve life is lower than that of peers, but is offset by its stronger financial profile.
DERIVATION SUMMARY
Fitch equalises PTTEP's ratings with that of its parent, PTT, based on strong linkages, in line with its Parent and Subsidiary Rating Linkage criteria. Our assessment of strong linkages is driven by its robust strategic and operational relationship with its parent. PTTEP is the flagship upstream company of PTT and is also the largest domestic oil and gas producer. It plays a critical role in meeting the country's energy security and supporting the parent's strategic function. It is also the largest contributor to PTT's EBITDA and sells most of its products to its parent, reflecting the high level of operational integration.
The equalisation of PTTEP's rating with its parent's is similar to that of PetroChina Company Limited (A+/Stable), the key operating entity under China National Petroleum Corporation (CNPC; A+/Stable). PetroChina also has strong linkages with CNPC, resulting in the equalisation of its ratings with that of its parent. We believe the strategic and operational linkages between PTTEP and PTT are stronger than those between PT Perusahaan Gas Negara Tbk (PGN; BBB-/Stable) and its parent, PT Pertamina (Persero) (BBB/Stable), resulting in PGN's rating being one notch below that of its parent.
KEY ASSUMPTIONS
Benchmark Brent crude at USD35/bbl in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and USD55/bbl thereafterFitch assumes a derivative gain of USD300 million as a result of PTTEP's oil hedging programmePTTEP's gas selling prices of USD5.9/million btu in 2020, USD4.9/million btu in 2021, USD 5.5/million btu in 2022 and a gradual improvement thereafterProduction of both oil and gas to increase by 3% in 2020 and around 5% thereafterCapex of USD2.2 billion in 2020, USD2.8 billion in 2021 and USD3.2 billion in 2022We assume decommissioning expenses of USD500 million in 2022
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Any upgrade in the parent's IDR, provided linkages remain intact. Factors that could, individually or collectively, lead to negative rating action/downgrade:A downgrade of PTT's IDR.Any significant weakening of linkages with the parent, though considered unlikely over the medium term.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: PTTEP's liquidity is supported by its cash and cash equivalents of THB98 billion, against debt of THB102 billion, as at end-2019. PTTEP's cash balance fell from THB132 billion in 2018 following its THB84 billion acquisition in 2019. Fitch expects PTTEP's cash generation to broadly cover capex over the next four to five years and its access to domestic and international debt markets further supports its liquidity.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
PTTEP's ratings are linked to those of PTT.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com