The affirmation reflects PTT's 'BBB+' standalone credit profile, which is at the same level as that of the sovereign (BBB+/ Stable) under Fitch's Government-Related Entities Rating Criteria. PTT's ratings will be equalised with the sovereign in case of any weakening in its standalone credit profile, provided the linkages remain intact. PTT's standalone rating reflects its integrated business model and strong financial position, although the upstream profile remains challenged. PTT's low financial leverage provides headroom for the company to address depleting reserves in the upstream business.
KEY RATING DRIVERS
Weak Reserve Profile: Fitch expects the reserve profile of PTT's upstream operations to remain weak against exploration and production companies Fitch rates in the 'BBB' category. PTT's oil and gas proved reserves continued to decline in 2017. Its upstream company has significant contingent resources that can be migrated in due course with sufficient investment, but a substantial rise in proved reserves from organic sources is not likely in the next two years. However, the company's plan to acquire an additional stake in the Bongkot concession in Thailand will increase its sales volume and cash generation from the upstream operations in 2018-2019.
Renewal Risk for Bongkot: PTT faces renewal risk, as its concession at the Bongkot gas field is due to expire in 2022-2023. The loss of this project, which accounted for about 24% of upstream sales volume in 2017, would significantly cut its upstream production and worsen its already-weak reserve profile. PTT Exploration and Production Public Company Limited, PTT's exploration and production arm, is the existing operator of the Bongkot field. This may be advantageous for the bid, although may not guarantee renewal of the project.
The government will change the contracts to explore and produce petroleum for the renewal of the Bongkot and Erawan projects to be production sharing contracts, from the current concession regime. Under the term of reference for the project renewals, the winner has to continue field gas production of at least 700 million standard cubic feet per day (mmscfd) for Bongkot and 800mmscfd for Erawan at gas prices not higher than current prices. The government expects to conclude bidding for the two projects by end-2018. Fitch treats the auction as an event risk and will assess the impact on PTT's business profile after the auction is completed.
Headroom to Support Investments: PTT has a strong balance sheet to support investments. Its FFO adjusted net leverage fell to 0.8x in 2017, from 1.1x in 2016, supported by better-than-Fitch-expected operating cash flow from strong natural gas and downstream operations. We expect leverage to stay at about 1.0x in 2018-2019, although capex is likely to revert to pre-2015-2016 levels. This provides the company with more headroom to support upstream business M&A and make additional investments.
Significant Medium-Term Capex: Fitch expects capex for PTT and its subsidiaries to continue rising in 2018, from THB143 billion in 2017, which increased from THB111 billion in 2016 after capex cuts in 2015-2016. Improved oil prices mean the company is likely to boost investments in 2018-2019 to support medium-term growth. In addition, PTT has earmarked THB245 billion of provisional capex for s-curve and new areas of business expansion, such as LNG value chain, energy storage and smart cities, although it does not have tangible plans for these investments.
Ratings Reflect 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 earnings deterioration in the upstream operations since 2H14.
Stable Cash Flow from Gas: PTT's financial profile benefits from relatively stable cash flows 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 its sales 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.
Parent Linkage: Fitch rates PTT on a standalone basis, as its standalone credit profile is at the same level as the Long-Term IDR of its parent, Thailand, as per Fitch's criteria. However, the agency sees the strength of government support for PTT as strong, and therefore its ratings should align with the sovereign.
Strength of Linkages with State: Fitch believes PTT's status, ownership and control by the sovereign is moderate. The state directly owns 51% of PTT and appoints its board and senior management. We see the support record and expectations of the likelihood of state support to PTT as strong. There has been no explicit tangible financial support from the state due to PTT's strong financial position, but we expect support to be forthcoming if needed in light of PTT's strategic importance form its key role in Thailand's oil and gas sector.
State's Incentive to Support: 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 potential default as strong, as it could limit the availability and cost of domestic or foreign financing options for the state and government-related entities.
DERIVATION SUMMARY
PTT's ratings reflect its integrated business model. Its upstream operational profile is weak relative to 'BBB+' rated upstream peers, but its diversification in mid- and downstream businesses and large exposure to gas in the upstream business, which is more stable, support its ratings. The ratings also reflect PTT's medium-sized operating scale. It is significantly smaller than China National Petroleum Corporation (A+/Stable) and Petroliam Nasional Berhad (PETRONAS) (A-/Stable), whose ratings are constrained by that of their sovereign. PETRONAS also has a stronger financial profile than PTT.
PTT has larger operating scale in terms of sales and EBITDA than OMV AG (A-/Stable) and Repsol, S.A. (BBB/Stable), but has a weaker reserve profile. PTT has similar profitability and credit metrics to OMV, but OMV operates in lower-risk countries. PTT has stronger credit metrics and slightly higher profitability than Repsol.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Brent crude oil price of USD57.5 per barrel
- Exploration and production business sales volume to increase in 2018 and 2019 then decrease afterward
- EBITDA from the gas, petrochemical and refining businesses to fall in 2018, but remain healthy
- Capex to increase in 2018-2020 (2017: THB143 billion)
- USD750 million acquisition of an additional stake in the Bongkot field in 2018, but no other M&A
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- An upgrade of Thailand's IDRs, provided rating linkages remain intact
- We do not expect positive rating action on PTT's standalone credit profile over the next 18-24 months due to weakness in its upstream operations, especially its reserve profile
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- A downgrade of Thailand's ratings.
- Weakening of the sovereign's willingness and incentive to support PTT, combined with significant weakening of PTT's standalone credit profile.
Factors that may lead to negative action on PTT's standalone profile include:
- Large debt-funded investment or weaker operating cash flow resulting in a sustained deterioration of its FFO adjusted net leverage to over 2.8x
- A weakening financial profile of its upstream operations - PTT Exploration and Production Public Company - with FFO adjusted net leverage above 2.5x and failure to address its declining reserve life in the medium-term
- Adverse changes to regulations, gas sale contracts or pipeline tariffs
For the sovereign rating on Thailand, the following sensitivities were outlined by Fitch in its rating action commentary of 14 June 2017.
The main factors that could, individually or collectively, lead to positive rating action include:
- A sustained improvement in growth above Fitch's expectations without the emergence of imbalances.
- Resolution of social and political tensions sufficient in scale to improve governance and development indicators.
The main factors that could, individually or collectively, lead to negative rating action are:
- Renewed political disruption on a scale sufficient to have a significant effect on Thailand's economy.
- A large and sustained rise in Thailand's government debt ratios, for example, due to a fiscal deterioration or materialisation of contingent liabilities on the sovereign balance sheet.
LIQUIDITY
Strong Liquidity: PTT's liquidity reflects its available cash of THB344.7 billion at end-2017, compared with THB84.6 billion of debt maturing within 12 months. Its liquidity is also supported by solid cash flow generation and access to debt-capital markets and bank funding. PTT's debt maturity profile remains comfortable, with an average term to maturity of 6.7 years.
FULL LIST OF RATING ACTIONS
PTT Public Company Limited
- Long-Term IDR affirmed at 'BBB+'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB+'; Outlook Stable
- Short-Term IDR affirmed at 'F2'
- National Long-Term Rating affirmed at 'AAA(tha); Outlook Stable
- National Short-Term Rating affirmed at 'F1+(tha)'
- Senior unsecured debt National Long-Term Rating affirmed at 'AAA(tha)'.