OREANDA-NEWS. February 16, 2015. Fitch Ratings (Thailand) Limited has affirmed Thai Oil Public Company Limited's (TOP) National Long-Term Rating at 'AA-(tha)', National Short-Term Rating at 'F1+(tha)', and the National Long-Term Rating on its senior unsecured rating at 'AA-(tha)'. The Outlook is Stable.

KEY RATING DRIVERS
Adequate Headroom: TOP's ratings reflect its strong balance sheet with low financial leverage that provides adequate headroom to absorb the expected stock losses arising from the sharp fall in crude oil prices in 4Q14 to 1Q15. While this will impact its credit metrics for FY14 and Q115, the agency expects TOP to be able to maintain its funds from operations (FFO)-adjusted net leverage below 1.75x over the medium-term, which will be helped by lower capex from 2016.

Complex and Low-Cost Refiner: TOP's ratings take into account its large production size compared with domestic peers, its complex production capacity, and resultant cost competitiveness. Continuous improvements in efficiency and an increase in higher-value products have helped TOP maintain its competitive position. The complex configuration and low operating cost of its refineries have also supported high utilisation rates.

Business Diversification: TOP's forward integration into aromatics, lube base oil and solvents has broadened its product range and reduced margin volatility. Expansion into benzene derivatives will enhance its product range. Fitch expects higher earnings from its power-generation business from 2016 as two new co-generation plants come on stream; although the contribution from power generation to overall EBITDA will be small at around 6%-8%.

Linkages with PTT: TOP's Long-Term National Ratings incorporate a one-notch uplift from its standalone credit profile, reflecting its linkages with PTT Public Company Limited (PTT, AAA(tha)/Stable). This reflects TOP's strategic importance to PTT (aside from PTT being the single largest shareholder of TOP, with a 49% interest). TOP is PTT's key refiner and major supplier to PTT's oil-retailing business, supplying about one-third of requirements.

Highly Cyclical: TOP's credit profile is tempered by the inherent cyclicality of its businesses. The company also has only one production site. High dependence on PTT for sales (41% of petroleum product sales in 9M14) is partly mitigated by PTT's strong credit profile, and by its position as Thailand's main oil marketing and trading company. TOP is also exposed to supply risk, as Thailand is highly dependent on foreign oil.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Feedstock costs in line with Fitch's global oil and gas price forecasts.
- Gross refinery margin to improve in 2015, driven by stabilised oil prices, completion of high-vacuum unit (HVU) Revamp and crude distillation unit (CDU)-3 Crude preheat train improvement in late 2014, and completion of other margin improvement projects.
- 102% refinery utilisation in 2015-2016. Paraxylene (PX) spread will remain under pressure due to oversupply.
- Capex to reduce in 2015-2016 from 2014.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Sustained FFO-adjusted net leverage below 0.75x, although this is unlikely in the medium term
- Evidence of stronger ties with PTT

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Sustained lower-than-expected refining margins and petrochemical spreads and/or an increase in debt-funded investments resulting in FFO-adjusted net leverage rising above 1.75x
- Weakening of linkages with PTT