Ratings out for PTT's dollar-denominated bonds

 

 

 

"PTT group's ambitious expansion strategy for 2012-2016, which has  resulted in negative free cash flow generation and a higher reliance on debt, has reduced the group's rating headroom," says Simon Wong, a Vice President and Senior Analyst at Moody's.

PTT's consolidated debt/proved reserves, forecast at over US$18 per barrel or equivalent (boe) for the next two years, is weakly positioned when compared to the single-digit debt/proved reserves of most of its "Baa"-rated integrated oil & gas peers.

The group's capital expenditure plans worth Bt900 billion for 2012-2016 include spending to boost PTTEP's upstream resources and production, expand PTT's own gas business, diversify into related businesses, such as coal, palm oil and power, as well as expand the petrochemicals portfolio of its downstream companies. PTT's plan to subscribe to PTTEP's equity issuance and its recent acquisition of Sakari Resources, will also 

weaken PTT's liquidity on an unconsolidated basis.

At the same time, PTT continues to receive strong support from domestic

banks and has access to the debt capital markets. Some risks could also by partially mitigated from higher government support, Wong added. 

Constraining factors for the rating include PTT's high debt to proved reserve ratio; its small production base; and its strong domestic focus when compared with other similarly rated major integrated oil & gas companies.

Over time, positive rating pressure would emerge if PTT lowers debt leverage due to: 1) successful project development at PTTEP, leading to growth in reserves and production, 2) strengthening of cash flow from PTT's gas business, or 3) significant growth in contributions from PTT's non-conventional investments.

Downward rating pressure could emerge if PTT's financial leverage continues to deteriorate as a result of: 1) a reduction in the cash flow contribution from PTT's own gas business; 2) major hurdles faced by PTT or PTTEP in implementing expansion plans; 3) PTT or PTTEP funding their expansion with debt more aggressively than expected; 4) PTT providing financial support to its associates beyond levels determined by its pro-rata ownership stakes; or 5) PTT engaging in aggressive initiatives for shareholder returns.

To S&P, PTT's business risk profile is "satisfactory". It expects PTT's cash flow adequacy ratios to moderate in 2012-2014 due to the company's peak capital expenditure requirements of Bt233.9 billion during this time, mainly for its upstream and gas businesses. This amount does not include the capital expenditure requirements of PTTEP. It also does not include PTT's investment in PTTEP's equity-raising plan.

"We expect PTT to generate negative free operating cash flows on a consolidated basis in 2012 and 2013 and use debt to partially fund the capital investments. Pro forma for the proposed notes issue, we forecast the consolidated average ratio of funds from operations (FFO; not including associate income) to total debt at 30-35 over 2012-2014. These measures remain adequate for PTT's "intermediate" financial risk profile, as our criteria define the term. The company also maintains some flexibility in its investment plans. About 50 per cent of its planned capital expenditure over 2012-2014 is related to mergers and acquisitions and is discretionary," S&P said.