THURSDAY, March 28, 2024
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Thai Oil 'BBB' rating affirmed

Thai Oil 'BBB' rating affirmed

SINGAPORE - Standard & Poor's Ratings Services today affirmed its 'BBB' long-term corporate credit rating on refinery and petrochemical company Thai Oil. We also affirmed our 'axA' long-term Asean regional scale rating on the company and our 'BBB'

We affirmed the ratings based on our opinion that Thai Oil will remain a highly strategic member of the PTT group. We believe the government will support the group if it experiences financial distress and extend its support via PTT Public Co. Ltd. (PTT) to the group members. We believe it is highly unlikely that PTT will divest its 49.1 per cent controlling stake in Thai Oil, given the company's high level of product, marketing, and operational integration with the wider group. 
 
"Thai Oil's credit quality strengthened in 2015, and we expect this improvement to be sustainable in 2016-2017," said Standard & Poor's credit analyst Yuehao Wu. "This is because we project Thai Oil will accumulate positive discretionary cash flow over the period on resilient EBITDA and lower spending, and will allocate such funds as well as surplus cash on hand to reduce its debt. Accordingly, we have revised its financial risk profile to intermediate from significant and revised upward our assessment of Thai Oil's stand-alone credit profile to 'bbb-' from 'bb+'."
 
We forecast capital spending will decline to nondiscretionary levels of about Thai baht (THB) 6 billion per year over the next two years, in the absence of committed, large projects. We understand sizable spending under Thai Oil's Clean Fuel Project, a potentially multi-billion venture, will not start before 2019, should the company decide to move ahead. 
 
In our view, the company has satisfactory asset scale and complexity, good record of operating efficiency, satisfactory market position as well as favorable, albeit fair, product mix. Thai Oil is the largest refinery in Thailand with a 30 per cent market share and one of the most complex refineries in the 
region. Low operating cost and high utilization rates support resilient operating cash flow generations, barring crude price shocks. These factors underpin our view of the company's earnings.
 
The issue rating on the senior unsecured program remains 'BBB' because the priority liability as a proportion of total assets is below 20 per cent. Major debts rest with Thai Oil, which is itself a holding and operating company.
 
The stable outlook on Thai Oil reflects the outlook on the company's parent, PTT. It also reflects our view that Thai Oil's position as a highly strategic member of the PTT group will not change, given the company's operational linkage with the parent and its role as the group's major complex refinery. 
 
We expect Thai Oil's debt-to-EBITDA ratio to decline to 2x over the next two years with no major capital spending during the period. 
We may lower the rating on Thai Oil in any of the following scenarios:
We revise PTT's group credit profile downward to 'bbb' or below. This could happen if: (1) we lower the sovereign credit rating on Thailand (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1); (2) we assess a diminishing likelihood of extraordinary 
government support to PTT; (3) we assess the SACP of PTT to have substantially weakened; or (4) we assess that extraordinary government support will no longer flow through to Thai Oil via PTT.
We perceive Thai Oil's status within the group to have diminished significantly. Indications of diminished strategic importance include a lower integration between Thai Oil and PTT because of reduced shareholding by PTT, a termination of crude oil supply or product offtake 
by PTT, or a significant and lasting deterioration in the SACP of Thai Oil.
We may revise downward our SACP on Thai Oil if its debt-to-EBITDA ratio is sustainably higher than 3x. This could materialize if: (1) gross profit per barrel stays below US$4.8 due to severe industry conditions; (2) the company embarks on debt-funded, large-scale capital projects; or (3) the company has higher-than-expected working capital outflow that is unlikely to reverse.
 
We may raise the rating on Thai Oil if one of the following occurs:
Our assessment of the group credit profile on PTT rises to 'a-' or above. This could materialize if we raise the sovereign credit rating on Thailand and PTT improves or maintains its SACP.
We revise upward Thai Oil's group status to core. This could happen if PTT substantially increases its shareholding above 50 per cent and Thai Oil constitutes a significant portion of the consolidated group's cash flow generation.
Thai Oil's SACP improves to 'bbb+'. We believe this would require one or more of the following: (1) a much stronger financial risk profile, such that the company's ratio of debt to EBITDA remains less than 2.0x on a sustained basis; (2) less sensitivity of cash flow adequacy and leverage ratios to product margin cycles; (3) a much stronger business risk profile stemming from better scale, diversity, cost positions, and resilience to volatile spreads.
We believe the potential for an improvement in Thai Oil's SACP is limited over the next 18 months, given the cyclical and capital-intensive nature of the refinery and petrochemical business. 
 
 
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