TEXT-S&P summary: PTT Exploration and Production Public Co. Ltd.
(The following statement was released by the rating agency)
Oct 08 - =============================================================================== Summary analysis -- PTT Exploration and Production Public Co. Ltd. 08-Oct-2012 =============================================================================== CREDIT RATING: BBB+/Negative/-- Country: Thailand Primary SIC: Oil and gas exploration services Mult. CUSIP6: 69364V =============================================================================== Credit Rating History: Local currency Foreign currency 26-Aug-2004 BBB+/-- BBB+/-- 08-Oct-2003 BBB+/-- BBB/-- =============================================================================== Rationale
The rating on Thailand-based PTT Exploration and Production Public Co. Ltd. (PTTEP) reflects the company's strategic importance to PTT Public Co. Ltd. (PTT; BBB+/Stable/--) and the government of Thailand (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1). The rating also reflects PTTEP's strong domestic position and solid profitability and cash flow.
The company's dependence on PTT for almost all its revenue, and its aggressive growth plans partly offset these strengths. PTTEP's other rating weaknesses are execution risk for the development of its substantial proven but undeveloped fields, and related heavy capital requirements.
We assess PTTEP's stand-alone credit profile at 'bbb+'. We assess the company's business risk profile as "satisfactory" and its financial risk profile "intermediate," as our criteria define the terms. In accordance with our criteria for rating government-related entities, we see a moderately high likelihood of extraordinary government support for PTTEP.
PTTEP's solid cash flow generating capability is a key support for the company's financial risk profile. We expect internally generated cash flows for the next 12 months to remain strong enough to fund existing developments, operational investments, and dividends. Elevated oil and gas prices in the second half of 2012, and improving output from Bongkot South and S1 oilfields in Thailand, Vietnam 16-1 oilfield, and the Kai Kos Dehseh oil sands project in Canada should support PTTEP's cash flows. We expect the company's average funds from operations (FFO) at about Thai baht (THB) 100 billion per year over 2012-2013.
In our view, PTTEP has little capacity to use operating cash flow to reduce debt or fund its stated growth plan of boosting production to 500 thousand barrels of oil equivalent per day (mboepd) by 2015 and to 900 mboepd by 2020. This growth is likely to occur through acquisitions, such as PTTEP's recent acquisitions in Canada (Kai Kos Dehseh) and Mozambique (Cove Energy PLC ). These were funded mostly with debt, resulting in PTTEP having credit metrics that are weaker than our expectations for the rating. The ratio of debt to EBITDA for the 12 months ended June 30, 2012, was about 1.1x. This ratio does not factor in bridge loans associated with the acquisition of Cove.
PTTEP's debt could remain elevated for the next two years due to the company's sustained growth strategy, existing investment plans, and its current cash flow profile. The company plans to raise about US$3 billion by the end of 2012 by issuing up to 650 million new shares. A successful equity raising is credit positive in our view and could lower debt to more tolerable levels. However, we would consider the equity raising in our analysis only once it is completed. We would also consider whether the capital raising sufficiently reduces PTTEP's reliance on debt to fund future growth and improves forecast credit metrics. We expect a debt-to-EBITDA ratio of about 1x on a sustained basis to be adequate for the current rating level.
PTTEP has "adequate" liquidity, as our criteria define the term. We expect PTTEP's sources of liquidity, including cash and available credit facilities, to exceed its uses of liquidity by at least 1.2x in the next 12 months.
Our liquidity assessment incorporates the following factors and assumptions:
-- As of June 30, 2012, PTTEP has unrestricted cash and cash equivalents of THB18.7 billion, compared with THB15.8 billion of short-term debt due (including accrued interest and short-term provision for decommissioning costs).
-- PTTEP also has access to short-term credit facilities and bridge financing for the Cove acquisition.
-- Liquidity sources over the next 12 months include our expectation of FFO of about THB100 billion, available credit facilities, and cash and current investments.
-- Liquidity sources do not factor in the company's planned capital raising.
-- Liquidity needs over the next 12 months include our expectation of capital expenditure of about THB130 billion (including the Cove acquisition), and dividends and debt repayments of about THB30 billion.
-- We anticipate that the company's liquidity sources will exceed its needs even if EBITDA declines by 15%.
PTTEP will need sizable investments in the next two to three years, mainly to boost output from its production and development blocks. Nevertheless, we believe liquidity will remain adequate due to the company's solid profitability and cash flow generation. We also believe that PTTEP will continue to have strong access to external funding, given its market position and indirect connection to the government, through PTT.
The negative outlook reflects our view that PTTEP's growth plans could lead to increased debt and weaken credit metrics outside our expectations for the rating. The outlook does not consider the company's planned capital raising.
We may lower the rating on PTTEP if any of the following occur: -- We lower the ratings on PTT and Thailand.
-- PTTEP departs significantly from the financial targets that PTT established, thereby affecting PTTEP's stand-alone credit profile and pushing the ratio of debt to EBITDA above 1.0x and the debt-to-capital ratio to 45% on a sustained basis. Debt-financed acquisitions or capital expenditure could cause such deterioration.
-- Operational problems at PTTEP's development projects result in significant cost overruns or delays in production growth.
-- Business integration with PTT shifts considerably--such that PTT's shareholding in PTTEP materially declines below 50%--changing our assessment of PTTEP's role and link with the government.
Conversely, we could revise the outlook to stable if: -- PTTEP maintains or improves its business risk profile; and
-- The company executes its growth strategy over the next two years and sufficiently grows its reserve and production base while maintaining credit metrics that are commensurate with the 'BBB+' rating. For this to occur, we would expect the company to maintain a lease-adjusted ratio of total debt to EBITDA of about 1.0x and debt to capital below 40% on a sustainable basis.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Credit FAQ: What's The Credit Impact Of PTT Exploration And Production Public Co. Ltd.'s Growth Strategy?, Aug. 27, 2012
-- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012
-- Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008