Fitch has also assigned an 'AAA(tha)' rating to PTT's proposed senior unsecured debentures of up to THB2 billion. The proposed debentures will constitute PTT's direct, unsecured, unconditional and unsubordinated obligations and are rated at the same level as its National Long-Term Rating, in line with its other senior unsecured debt.
PTT's long-term ratings reflect its Standalone Credit Profile (SCP) of 'bbb+', which is at the same level as the Thai sovereign rating (BBB+/Stable). PTT's long-term ratings will remain equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria if the SCP weakens, provided our assessment of PTT's strong likelihood of receiving state support under the criteria remains unchanged. The Short-Term IDR is also equalised with the sovereign's Short-Term IDR.
PTT's SCP reflects its integrated business model and robust financial position. We expect the oil and gas, and chemical businesses to lead PTT's core growth through to 2030, although the company plans to transition into the low-carbon energy business and into sectors beyond the energy industry.
KEY RATING DRIVERS
'Strong' State Linkage: We assess PTT's status, ownership and control by the sovereign as 'Strong', in line with our assessment for other rated government-related entities (GREs) in the region. The state allows PTT to operate as a commercial entity, but has broad control over its business strategy and key investment decisions. We assess the record of state support as 'Strong'; while there has been no tangible financial support due to PTT's strong financial position, we believe support would be forthcoming, if needed, in light of PTT's strategic role in Thailand's oil and gas sectors.
'Very Strong' Socio-Political Impact of Default: We have reassessed the socio-political implications of a default by PTT to 'Very Strong', from 'Strong', to better align with other rated national integrated oil and gas companies. A default would curtail oil and gas availability in Thailand, impacting electricity generation and weaken the country's energy security. We assess the financial implications of a default as 'Strong', as PTT is a major state-owned borrower and domestic bond issuer and a default could tighten domestic and foreign financing options and increase financing costs for the state and GREs.
Strong, but Moderating Earnings: We expect EBITDA to soften in 2023, driven by lower EBITDA from the upstream operation on lower oil and gas prices. Nevertheless, prices should stay above those in 2016-2021. Lower gas costs should also enhance profitability and operating cash flow of PTT's natural gas sales to industrial users, as well as support a recovery in gas demand in 2023, from a decline of 6% in 2022. We expect EBITDA to remain strong at about THB385 billion in 2023 (2022: THB408.3 billion), and higher than pre-Covid-19 pandemic levels.
We expect EBITDA from the refinery and petrochemical business to recover in 2023 due to the absence of large hedging losses. PTT reported commodity hedging losses of THB65.3 billion in 2022, mainly from its refinery and petrochemical subsidiaries, as actual crude and product prices exceeded hedging prices. Petrochemical spreads are likely to remain weak in 2023 on new supply and slower demand growth.
Increasing Capex: We expect consolidated capex to continue to increase in 2023 (2022: THB208.0 billion), driven by capex in the upstream operation. PTT's acquisitions slowed in 2022 after large acquisition in 2021. We believe the company is likely to continue seeking acquisitions to expand its business and market and facilitate its low-carbon transition plans. We treat large acquisitions as event risks in light of the uncertainty around opportunities and execution risk.
Solid Financial Position: We expect PTT's financial profile to remain robust and well within its ratings, notwithstanding our forecast of rising capex and normalising oil and gas prices. EBITDA net leverage is likely to increase slightly to about 2.0x in 2023-2024, from 1.9x in 2022, but financial leverage should stay consistent with PTT's current ratings.
Upstream Focus on Gas: PTT will continue to expand its upstream operation via upstream subsidiary, PTT Exploration and Production Public Company Limited (BBB+/Stable). The focus is on natural gas assets to ensure gas-supply security for the country and to support PTT's integrated gas value chain strategy. The subsidiary plans to boost production by a CAGR of 6% over the next five years, to reach output of 787,000 barrels of oil equivalent per day (boed) by 2027 (2022: 581,000 boed). Its focus on natural gas production (2022: 73% of production) bridges conventional and alternative energy sources.
Gas Value Chain Expansion: PTT plans to lift liquefied natural gas (LNG) imports for local and international trade to about 9 million tonnes per annum (mtpa) by 2030, which it aims to supply mostly under long-term contracts. It secured an additional 1mtpa of LNG supply under a long-term contract in 2022, to start from 2026. PTT also plans to build its eighth gas separation plant to enhance value of LNG imports, as well as expanding LNG receiving terminals and facilities to support its LNG hub plan.
New Energy Business: PTT plans to diversify into future-energy businesses, such as renewable power, energy storage and related systems, the electric-vehicle value chain and hydrogen. It also intends to enter new businesses, including life sciences, technology and digitalization as well as logistics and infrastructure. The company expects to raise its renewable capacity to 12GW by 2030. PTT group budgets about 32% of capex for 2021-2030 for future energy and other new businesses and targets a net profit contribution from these businesses in excess of 30% by 2030 (2022: less than 1%).
Dominance in Gas Business: We expect PTT to remain dominant in the domestic gas business in the medium term, although other companies are allowed to import LNG for local distribution. Imports are supplied to end-users via LNG receiving terminals and gas pipelines, which are operated solely by PTT, with regulated fixed-fee charges. PTT's long-term LNG supply contracts with offshore producers and import record give it advantages against competitors.
Stable Cash Flow from Gas: PTT's financial profile benefits from stable cash flow from its natural gas business, including gas transmission, and sale and distribution to power producers and gas-separation plants. This is underpinned by steady demand and long-term sales agreements with take-or-pay conditions on a cost-plus pricing structure. The earnings of gas-separation plants and natural gas sales to industrial users are more volatile, as adjustments to the cost of gas purchases - which are based on long-term contracts - lag that of product prices.
DERIVATION SUMMARY
PTT's ratings will remain equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria if the SCP weakens, provided our assessment of PTT's strong likelihood of receiving state support under the criteria remains unchanged
We assess PTT's status, ownership and control as 'Strong', in line with that of other major state-owned oil and gas companies in Asia, such as Oil India Limited (BBB-/Stable) and Korea Gas Corporation (AA-/Stable). We assess PTT's support record as 'Strong', in line with that of Malaysia's Petroliam Nasional Berhad (PETRONAS) (BBB+/Stable), which has also received only limited tangible financial support in light of its strong financial profile. However, we believe both companies are likely to receive support, if needed.
We assess the socio-political implications for the government should PTT default as 'Very Strong', similarly to PETRONAS and China National Petroleum Corporation (CNPC, A+/Stable), based on the companies' importance to the economy and the state.
We assess the financial implications for the government should PTT default as 'Strong', compared with 'Very Strong' for PETRONAS and CNPC, because PTT is not viewed as a proxy government borrower, despite being one of Thailand's key GRE borrowers.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Benchmark Brent crude at USD85/bbl in 2023, USD75/bbl in 2024, USD65/bbl in 2025 and USD53/bbl in 2026 and thereafter
- Exploration and production business sales volume to increase by about 2% CAGR in 2023-2027 (2022: 12.5%)
- EBITDA from the refinery and petrochemical business to recover in 2023 in the absence of large hedging losses
- EBITDA from the gas business to improve in 2023
- Capex to increase in 2023-2024 (2022: THB208 billion)
- Dividend payout ratio at about 50%-55%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An upgrade of Thailand's IDR, provided the likelihood of support remains intact
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of Thailand's ratings
Factors that May Lead to a Deterioration in PTT's SCP:
- Large debt-funded investment or weaker operating cash flow, resulting in a sustained deterioration in EBITDA net leverage to over 2.5x.
- Adverse changes to regulations, gas sales contracts or pipeline tariffs.
For the sovereign rating of Thailand, the following sensitivities were outlined by Fitch in its ratings action commentary of 30 November 2022:
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- Macroeconomic: An improvement in medium-term growth prospects without a significant rise in non-financial private-sector debt.
- Public Finances: A decline in the general government debt to GDP ratio, for example due to smaller fiscal deficits and/or improving medium-term growth potential.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- Public Finances: Inability to stabilise the general government debt ratio, for example, due to a prolonged fiscal deterioration, or continued spending pressures.
- Structural Features: Heightened political disruption on a scale sufficient to alter Thailand's economic policymaking effectiveness and growth prospects.
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: PTT's liquidity is supported by available cash of THB347.3 billion at end-2022, against THB164.8 billion of debt maturing within 12 months. Its liquidity is also supported by undrawn committed bank credit facilities of THB32.0 billion at end-2022, 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 10.7 years.
ISSUER PROFILE
PTT is Thailand's integrated national oil and gas company. It operates across the entire oil and gas value chain through its subsidiaries, including upstream, midstream, refining and retail, and chemicals. PTT also diversifies into power generation. PTT is 63% directly and indirectly owned by the Ministry of Finance.
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
PTT's ratings are equalised with those of the Thai sovereign, based on Fitch's GRE criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
Source: Fitch Ratings