Fitch Assigns #BBB+# Rating to PTT Exploration#s Proposed Notes

Stocks and Financial Services Press Releases Thursday January 9, 2020 14:18
Bangkok--9 Jan--Fitch Ratings

Fitch Ratings has assigned a 'BBB+' rating to PTT Exploration and Production Public Company Limited's (PTTEP; BBB+/Positive) proposed US dollar notes. The notes will be issued under its global medium-term note programme (GMTN) by its fully owned financing subsidiary, PTTEP Treasury Center Company Limited.

PTTEP's ratings are equalised with that of its parent, PTT Public Company Limited (PTT; BBB+/Positive), reflecting our assessment of the strong operating and strategic linkages between the two companies. We assess PTTEP's Standalone Credit Profile (SCP) at 'bbb', reflecting its reasonable production size, relatively low but improving reserves and strong financial profile.

The GMTN programme and US dollar notes are rated at the same level as PTTEP's senior unsecured debt as they constitute direct, unconditional, unsubordinated and unsecured obligations of PTTEP. The bond proceeds will be used mostly to refinance existing debt.


Strong Linkages with Parent: The assessment of strong linkages between PTTEP and its parent is in line with Fitch's Parent and Subsidiary Rating Linkage criteria and is driven by the integrated operations of the two companies, as PTTEP provides the group's crucial upstream integration. PTTEP sold more than 80% of its production to PTT, derived nearly 90% of its revenue from its parent and contributed about 36% of PTT's consolidated EBITDA in 2018.

The company also plays an important part in supporting its parent's strategic role in Thailand's oil and gas sector and improving the energy security of the country. 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.

Improving Operating Profile: We expect PTTEP's acquisitions of Partex Holding B.V's and Murphy Oil's Malaysian upstream assets and contract wins at the Erawan and Bongkot natural gas fields in Thailand to boost production and reserves. PTTEP acquired an additional stake in the Bongkot fields in 2018, which largely arrested the fall in proved reserves over the past few years. The domestic contract wins eliminated the risk of production loss from the Bongkot project, which accounted for about 27% of upstream sales volume in 2018, and will increase PTTEP's dominance in natural gas production. The Erawan and Bongkot fields accounted for about 60% of domestic gas production in 2018.

PTTEP and its partners made the final investment decision on a Mozambique liquefied natural gas (LNG) project on 18 June 2019. The project should add 140 million barrels of oil equivalent (boe) to PTTEP's proved reserves, which totalled 677 million boe at end-2018, representing a weak proved reserve life of around five years. We think its investments, including the Mozambique LNG project, and contract wins will augment PTTEP's reserve profile and production volume over the medium to long term. Its proved reserve life should improve over the medium term to about seven years, which remains weaker than that of other exploration and production companies rated in the 'BBB' category.

Large Investments: We estimate PTTEP will invest around THB480 billion (USD15 billion) over the next five years amid its bid to boost production and reserves, including spending on its recently announced acquisitions, outlay for development projects in Algeria, Vietnam and Mozambique, investments in other recently acquired assets and continuing exploration efforts. Fitch has not factored in any major acquisitions in our assessment and will treat any as an event risk.

Strong Financial Profile: We expect PTTEP's financial profile to remain strong despite the large investment plans. Rising production volume, in our view, will strengthen PTTEP's operating cash flow, resulting in mostly positive free cash flow from 2020 in the absence of large acquisitions, given Fitch's oil and gas price assumptions. We consequently expect the company to maintain net leverage at around zero over the medium term (0.1x in 9M19). We believe the strong financial profile provides adequate headroom for the company to make large investments.

'bbb' Standalone Credit Profile: PTTEP's 'bbb' SCP reflects its position as Thailand's largest oil and gas producer, gradually improving albeit weak reserve life, rising production volume, competitive cost position and strong financial profile. Cash costs improved to USD14.6/boe in 9M19 (2018: USD15.1/boe) and the company expects to continue its cost-optimisation measures to maintain its competitive cost position.


Fitch equalises PTTEP's ratings with that of its parent, PTT, based on their strong linkages in line with our Parent and Subsidiary Rating Linkage criteria. Our assessment of the 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 energy security of the country 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.

Fitch's Key Assumptions Within Our Rating Case for the Issuer
  • Production volume to increase by about 10% a year in 2019 and 2020 (2018: 131 million boe)
  • Crude oil prices as per Fitch's Brent price deck - USD65.0/barrel (bbl) in 2019, USD62.5/bbl in 2020, USD60.0/bbl in 2021 and USD57.5/bbl thereafter
  • Gas selling prices to move broadly in line with crude prices
  • Capex of USD2 billion-4 billion per annum over the next five years (2018: USD2.4 billion)
  • Dividend payout ratio of 50% (2018: 55%)
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • Any upgrade in the parent's Issuer Default Rating (IDR), provided linkages remain intact.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • A downgrade of PTT's IDR.
  • Any significant weakening of linkages with the parent, though considered unlikely over the medium term.
For PTT's rating, the following sensitivities were outlined by Fitch in its rating action commentary of 3 May 2019.
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • An upgrade of Thailand's Issuer Default Rating, provided likelihood of support remains intact.
  • We do not expect an upgrade of PTT's SCP over the next 18-24 months due to its weak upstream operations relative to peers.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • A downgrade of Thailand's ratings.

Strong Liquidity: PTTEP's cash balance of THB64 billion as of September 2019 supports its strong liquidity. The cash balances fell from THB129 billion at end-2018 due to acquisition expenses of THB65 billion and THB25 billion of capex. We expect PTTEP to remain mostly free cash flow positive without any acquisition over the medium term, given our oil-price assumption. This, in our view, will support PTTEP's healthy liquidity. The company's strong access to both domestic and international debt markets further supports its liquidity.


Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - 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 our ESG Relevance Scores, visit
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