Challenges ahead for PTT: Moody's

 "Due to buoyant oil prices, consolidated operating performance for 2011 improved over 2010, although there was a one-off negative impact from the floods in Thailand late in the year," said Simon Wong, a vice
president and senior analyst at Moody's.
 Consolidated revenue and EBITDA grew 27.9 per cent and 23.7 per cent from the previous year, driven by rising average selling prices for oil, natural gas, petrochemical products, as well as coal and, to a lesser extent, the increase in sales volumes across its product range. The results have no immediate impact on the company's Baa1 issuer and bond ratings or stable outlook, Moody's said.
 In particular, PTT Exploration and Production (PTTEP) saw its average selling price (ASP) increase 23.8 per cent to US$55.5/barrel or equivalent (boe). Similarly, PTT's  natural gas business reported healthy rises in the volumes and ASP of its gas products, benefiting from higher demand from the commercial operation of Gas Separation Plant 6 since January 2011.
 But the effects of the global economic slowdown and the floods were reflected in the fourth quarter results as EBITDA fell 3.6 per cent quarter-on-quarter. In particular, the natural gas segment's EBITDA fell 41.3 per cent.
 Over half of PTT's EBITDA, 56 per cent comes from PTT Exploration and Production Plc which is 65.29 per cent owned by PTT.
 "Looking ahead, PTTEP will remain a key earnings contributor of PTT, but the benefits from high crude prices and gas price revisions since the fourth quarter 2011 are likely to be offset by rising production costs due to its
unconventional assets," Wong said.
 In 2011, PTTEP reported revenue growth of 20.6 per cent to Bt165.9 billion, but sales volume were largely flat at 265,047 boe as the effect of the ramp-up of three projects -- MTJDA-B17 (the natural gas project in
the south of Thailand), KKD (the Canadian oil sands project) and Vietnam 16-1 -- was offset by production declines at other assets.
 PTTEP's EBITDA margin softened to 69 per cent from 71 per cent as production cash costs rose 27.5 per cent to US$13.9/boe, foreshadowing the increase in ASP.
 Moody's also noted that PTTEP continues to face challenges. It needs to cope with rising production costs, driven by its KKD oil sands project and offshore Vietnam 16-1 project. It targets to increase sales volumes by 7 per cent in 2012 with the start of new projects at BKT South and Montara. The large capital expenditure programme, which is peaking in 2012 at $3.6 billion, also needs to be managed. And, it also needs to reduce total adjusted debt to proved developed reserve metrics, a ratio which is expected to remain above 8 times during the ramp up phase of KKD in 2011.
 Nevertheless, PTTEP's current ratings factor in the high total debt to proved developed reserve metrics during the ramp-up of the KKD project.
 "At the same time, the outlook for its refining business associates is less favourable as refining margins peaked in 2011, and are expected to moderate in 2012 due to lower global product demand, while refining
capacity increases, widening the worldwide capacity surplus," added Wong.
 PTT reported a higher share of net income from its associates, which surged 56.6 per cent to Bt29.5 billion, thanks to a higher crack spread, driven by strong petroleum product demand, as well as a strong petrochemical
business performance.
 Complex refiners' accounting gross refining margin (GRM) improved 16.5 per cent to $7.07 per barrel during 2011. The olefins petrochemical associates expanded their sales volumes following the commercial operation of PTT Polyethylene Co Ltd's Ethane Cracker, HDPE unit and LDPE unit; while its aromatic petrochemical business also benefited from a higher spread margin during the year.
 Looking ahead, reconstruction after the flooding in Thailand and EURO IV implementation could alleviate the weaker outlook for the refining business, Moody's said, as retail prices could be raised.
  Meanwhile, PTT's liquidity position remains strong. At December 2011, it had consolidated cash and cash equivalents of Bt116.1 billion, compared to debt maturing within 12 months of Bt54.8 billion.