RPT-Fitch Affirms Ratings on Thailand's PTT; Outlook Stable
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Feb 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's (PTT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' and 'A-', respectively. The Outlook is Stable.
The agency has also affirmed PTT's Short-Term Foreign-Currency IDR at 'F2', National Long-Term Rating at 'AAA(tha)' with Stable Outlook and National Short-Term Rating at 'F1+(tha)'. The National Long-Term Rating on its senior unsecured debt has been affirmed at 'AAA(tha)'.
PTT's standalone credit profile is assessed at 'A-', however, its Long-Term Foreign-Currency IDR is constrained at 'BBB+' by the Foreign-Currency IDR of the state of Thailand (BBB+/Stable), which directly owns 51% of the oil and gas company.
KEY RATING DRIVERS
National Oil and Gas Company: PTT is dominant in Thailand's oil and gas industry, and plays a policy role in enhancing national energy security and development. It is the sole operator in gas transmission and distribution, and off-takes and resells nearly all of natural gas consumed in Thailand. Natural gas is a major fuel for the country's electricity generation. PTT is also one of Thailand's major exploration and production (E&P) companies, and a leading oil and petrochemical company.
Solid Cash Flow Generation: PTT's financial profile benefits from relatively stable cash flows from its gas interests. These cash flows are underpinned by stable demand and sales based on long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. The profitability of the gas mid-stream business has been affected by weaker margins on gas to affiliated petrochemical producers and losses on natural gas for vehicles. The gas business accounted for about 23% of PTT's EBITDA in 2012 (19% in 9M13, but this is due largely to the temporary outage of one of the gas separation plants). Moreover, of the company's E&P operations, which contributed about 67% of PTT's consolidated EBITDA in 2012, 66% was natural gas production, much of which is sold domestically.
Capex to Remain High: Fitch expects PTT's and its subsidiaries' capex to increase in 2014 as the company is investing in the E&P and gas businesses to ensure energy security for the country, particularly natural gas for electricity generation. PTT and its subsidiaries plan to spend about USD28bn for 2014-2018, with a large allocation of capex for E&P to increase production and reserve life. As a result, Fitch expects PTT's financial leverage (measured by FFO-adjusted net leverage) to increase in 2014, though it is likely to remain below 2.0x. Larger-than-expected debt-funded M&A, however, remains a risk for its standalone credit profile.
Mid-sized Integrated Operator: PTT's standalone credit profile reflects its integrated business model. Its upstream operations - scale, economics and financial metrics - are comparable with high 'BBB' category peers rated by Fitch. PTT's proved reserve life has, however, fallen to seven years at end-2013 (2010: 10 years), due to less than 100% reserve replacement in the last three years. Fitch expects some of the recent investments to add to PTT's proven reserve base, improving its reserve profile over time. The company has also pared its previously very aggressive 2020 production growth target of 600,000 barrels of oil equivalent per day. We expect PTT to focus on small to mid-sized investments that are producing or close to production.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an upgrade of Thailand's ratings
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- adverse changes to regulations and to gas sales contracts and pipeline tariffs
- large debt-funded investments and/or weaker-than-expected operating cash flow resulting in a sustained deterioration in FFO-adjusted net leverage to over 2.25x (end-2012: 1.5x)
- failure to address falling reserve life
- EBITDA from gas mid-stream business below 20% of the total EBITDA on a sustained basis
- downgrade of Thailand's ratings
Should PTT's standalone rating be lowered below that of the sovereign, Fitch would provide a one-notch uplift to its standalone rating on account of the linkages with the state under Fitch's parent-subsidiary linkage methodology.
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