TEXT-S&P affirms Thai Oil rating; proposed notes rated 'BBB'

Wed Jan 9, 2013 3:11am EST

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(The following statement was released by the rating agency)

Jan 09 -

Overview

-- Thaioil's strong liquidity and positive free operating cash flow should mitigate weaker credit metrics in the next 12-18 months.

-- We are affirming the 'BBB' corporate credit rating and existing issue ratings on Thaioil and affirming the 'axA' ASEAN scale rating on the company.

-- We are assigning a 'BBB' issue rating to a proposed issue of senior unsecured notes.

-- The stable outlook reflects the outlook on PTT because the rating on Thaioil factors in strong parental linkage and support.

Rating Action

On Jan. 9, 2013, Standard & Poor's Ratings Services affirmed its 'BBB' long-term corporate credit rating and 'axA' ASEAN regional scale rating on Thailand-based Thai Oil Public Co. Ltd. (Thaioil). The outlook on the corporate credit rating is stable. At the same time, we affirmed our 'BBB' issue rating on the company's US$350 million senior unsecured notes due 2015.

We also assigned our 'BBB' issue rating to a proposed issuance of senior unsecured notes.

Rationale

We affirmed the ratings on Thaioil to reflect our expectation that the company's credit metrics will gradually improve by the middle of 2014 after weakening in 2013. We believe higher leverage from the proposed debt issue and lower operating cash flows from thinner margins will contribute to the weakening. Thinner refinery margins will particularly affect cash flow because its refinery accounts for more than half of the company's marketing gross integrated margin.

We forecast that Thaioil's leverage will peak in 2013, with a ratio of debt to EBITDA of 3.6x. Our forecast factors in the company's investment plans of about US$1.0 billion over 2013-2016. This ratio is somewhat weak for the company's "intermediate" financial risk profile.

We expect Thaioil's liquidity to remain strong in the next two years. We also believe the company will maintain positive free operating cash flows, which will allow it to reduce debt, taking the debt-to-EBITDA ratio below 3.0x by 2014. We forecast the company's marketing gross integrated margin to average about US$6.9 per barrel over 2013-2014, compared with US$7.7 for the nine months ended Sept. 30, 2012.

Thaioil plans to use the proceeds from the notes for general corporate purposes, including capital spending, working capital, and refinancing.

The ratings on Thaioil reflect the company's continued operational integration with and strategic importance to state-owned oil and gas conglomerate PTT Public Co. Ltd. (BBB+/Stable/--; axA+). We assess the stand-alone credit profile of Thaioil at 'bbb-'. We view the company as having strategic importance to PTT and incorporate a one-notch uplift in our 'BBB' corporate credit rating on Thaioil.

The ratings also reflect Thaioil's favorable cost structure, flexibility in feedstock selection, and strong domestic market position. Thaioil's single-site and customer-concentration risks, the inherent industry risks, and the challenging outlook for the refining industry partially offset its strengths. Overall, we believe the global refining sector has to address a structural capacity oversupply, which is intensifying competitive pressure.

Thaioil's above-average refinery complexity and integrated refinery and petrochemical operations support the company's "satisfactory" business risk profile, in our view. The company's low cash costs allow it to continue operating at full capacity even when margins are weak. The group's integrated cash costs were US$1.70 per barrel as of Sept. 30, 2012. As a result, Thaioil's ratio of debt to EBITDA remained at 2.5x for the 12 months ended Sept. 30, 2012, despite the poor performance in the second quarter of 2012. The strong operating efficiency of Thaioil's production facilities at the Sriracha complex is important in mitigating industry volatility in margins, product prices, and feedstock costs.

Liquidity

In our view, Thaioil's liquidity is "strong," as defined in our criteria. We estimate that the company's sources of liquidity, including cash and available credit facility, will exceed its liquidity uses by at least 1.5x over the next 12 months. We also anticipate that the company's liquidity sources will exceed its uses even if EBITDA declines 30%. Our liquidity assessment incorporates the following factors and assumptions:

-- As of Sept. 30, 2012, the company had cash and current investments of Thai baht (THB) 17.3 billion. This is sufficient to cover short-term debt maturities of about THB2.1 billion.

-- Thaioil's access to committed and uncommitted bank lines also enhances its financial flexibility.

-- Liquidity sources over the 12 months ending Dec. 31, 2013, include our expectation of funds from operations of about THB15 billion, committed and uncommitted bank lines, cash and current investments, and proceeds from the new bond issuance.

-- Liquidity needs over the next 12 months include our expectation of gross capital expenditure of about THB10 billion (not including tax relief), and about THB19 billion in repayments for dividends and debt and working capital outflows.

Outlook

The stable outlook on Thaioil reflects the outlook on PTT because the rating on Thaioil factors in strong parental linkage and support. The rating on Thaioil is unlikely to be higher than PTT's 'bbb' stand-alone credit profile.

The outlook also reflects our expectation that Thaioil's debt-to-EBITDA ratio will gradually improve to below 3.0x by the middle of 2014 despite a softer operating environment for refiners and petrochemical companies in the next one to two years due to higher supply and weaker product prices. We expect the company to have positive free operating cash flow and to reduce debt in 2014.

We may lower the rating on Thaioil if any of the following occurs:

-- We downgrade PTT. Negative changes in the following could affect the rating on PTT: (1) the sovereign credit rating on Thailand (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1); (2) our opinion of the likelihood of extraordinary government support; and (3) our assessment of PTT's stand-alone credit profile.

-- Thaioil's business integration with PTT shifts considerably, such that PTT's shareholding reduces significantly, it terminates feedstock-supply or product-sales agreements, or ceases crude oil processing arrangements.

-- Significant cost overruns or delays in planned capital expenditure or a reduction in operating cash flow due to weaker-than-expected product prices and demand raise Thaioil's ratio of debt to EBITDA above 2.5x for an extended period.

Thaioil's exposure to the cyclical and capital-intensive nature of the refinery and petrochemical industries and the small scale of its refinery constrain the rating and its upward potential over the next two to three years. Nevertheless, we may raise the rating on Thaioil if we upgrade PTT and Thaioil's stand-alone credit profile improves because of: (1) a stronger business risk profile stemming from lower single-site risk; and (2) a better financial risk profile, such that the company's ratio of debt to EBITDA improves to less than 1.5x on a sustained basis.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011

-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

-- Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008.

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

New Rating

Thai Oil Public Co. Ltd.

Senior Unsecured BBB

Ratings Affirmed

Thai Oil Public Co. Ltd.

Corporate Credit Rating BBB/Stable/--

ASEAN Regional Rating Scale axA/--/--

Senior Unsecured BBB

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