Moody's changes PTTEP's outlook to negative
Moody's Investors Service has changed the outlook on PTT Exploration and Production Plc (PTTEP)'s credit rating to negative from stable, following the company's improved offer for Cove Energy Plc which could weaken its financial strength.
The current rating is affirmed at "Baa1".
Standard & Poor's Ratings Service recently changed the outlook from stable to negative. At this moment, the rating agency has made no further action, given that the acquistion of Cove remains conditional. The transaction is subject to the acceptance of
Cove's shareholders and approval from the government of Mozambique.
PTTEP on May 23 revised up its offer to 1,221 pound sterling, which is 25 per cent higher than the previous offer made in February. Its main competitor is Royal Dutch Shell, of which offer is 9.1 per cent lower.
"While the proposed acquisition is in line with PTTEP's strategy to expand its reserve base and increase its long-term production, the deal would be the company's second major acquisition in less than 18 months," said Simon Wong, a vice president and senior analyst at Moody's.
"The deal, if completed, will leave little to no headroom under PTTEP's
existing ratings. Also, PTTEP already has a large ongoing capital expenditure programme. Hence, these factors will add considerable pressure to its rating," added Wong, also Moody's lead analyst for PTTEP and its parent company, PTT Plc.
At the end of 2011, PTTEP's total adjusted debt to proved developed reserves was 10 times, which was already weak for its current rating, Moody's said. The ratio is expected to rise in 2012 as the company plans to spend US$3.6 billion thsi year, which is likely to result in negative free cash flow.
"We believe that PTTEP's willingness to increase its previous bid, combined with its existing capex programme and an ambitious long-term target to substantially increase its production and reserve size, may be challenging to balance within its current rating parameters," Wong said.
A downgrade is possible if (1) the debt to proved reserves ratio remains consistenly above 8 times, (2) retained cash flow to total debt falls consistently below 50 per cent, or (3) debt to average daily production exceeds $19,000, on a sustained basis.
Moody's also noted that in the long term, PTTEP may need to recapitalise to fulfil its ambitious longer-term strategy.
Meanwhile, Moody's said that PTT's rating outlook is stable, thanks to stable cashflow from its monopoly in gas transmission and distribution business. This cushions the possible pressure on PTTEP, which constitutes 60 per cent of PTT's earnings. PTT now owns 65.29 per cent in PTTEP.
Fitch Ratings also announced on May 24 that PTT's rating is not immediately impacted by the offer, though admitting that if accepted by Cove's shareholders, the acquisition would increase PTT’s financial leverage.
It noted that PTT's adjusted net debt/operating EBTIDAR will be close to 2 times in 2012, against 1.4 in 2011. Yet, the level still consistent with the current ratings and which Fitch expects to be maintained through to 2015.
Cove Energy is incorporated in England and Wales, with upstream exploration and production interests in Mozambique, Tanzania, and Kenya. Its principal asset is an 8.5 per cent stake in the Rovuma Offshore Area 1 project in Mozambique, operated by Anadarko Petroleum Corporation (Baa3, stable) who has a 36.5 per cent working interest. Rovuma Offshore Area 1 has five significant gas discoveries so far. Due to the significant estimated natural gas resources of between 24 and 50 trillion cubic feet, Cove is considering
a liquefied natural gas project, which is expected to be operational in 2018. Cove also has a 10 per cent stake in the Rovuma Onshore Area in Mozambique, as well as 10-25 per cent interests across seven blocks in Kenya offshore deepwater. As of end-2011, Cove had $147 million of cash on hand and no debt.
The planned acquisition is to support PTT Group’s plan to boost its oil and gas production to 900,000 barrels of oil equivalent per day by 2020 from 301,367 in 2011.
