OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's (PTT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' and 'A-', respectively. The Outlook is Stable.

The agency has also affirmed PTT's Short-Term Foreign-Currency IDR at 'F2', National Long-Term Rating at 'AAA(tha)' with Stable Outlook and National Short-Term Rating at 'F1+(tha)'. The National Long-Term Rating on its senior unsecured debt has been affirmed at 'AAA(tha)'.

Due to lower oil and gas prices, we expect PTT's credit metrics to weaken in 2015, but for them to remain appropriate for its stand-alone profile which is 'A-'. However, PTT's stand-alone credit profile is under some pressure owing to weaknesses in its upstream operations, primarily the weak reserve replacement over the last three years to end-2014, which has reduced its proven reserve life to around six years.

PTT's Long-Term Foreign-Currency IDR is constrained at 'BBB+' by the Thailand's Long-Term Foreign Currency IDR of 'BBB+' with Stable Outlook. The state directly owns 51% of the oil and gas company.

KEY RATING DRIVERS

Earnings Pressured: PTT will face pressure on its credit metrics in 2015 because of weaker operating cash flows stemming from lower oil prices and limited flexibility on capex. However, we expect PTT's FFO-adjusted net leverage to remain below 2.5x in 2015-2016, which is appropriate for its 'A-' stand-alone credit profile that reflects its integrated business model.

Strong Operating Cash Generation: PTT's financial profile benefits from stable cash flows from its gas business which is underpinned by steady demand and long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. The gas mid-stream business accounted for 22% (or about THB54bn) of PTT's consolidated EBITDA in 2014. About 73% (or about THB40bn) of this in 2014 was from natural gas sales to power producers and gas separation plants, and gas transmission operation. The profitability of these operations is resilient to fluctuations in oil and gas prices.

Exploration and production (E&P) operations accounted for 70% of PTT's consolidated EBITDA in 2014; with 69% of production volumes derived from natural gas, much of which is sold locally. While gas prices realised by its upstream operations will be negatively affected by lower oil prices, the magnitude of the price reduction is not as severe as the drop in oil prices. Furthermore, we expect PTT's cash generation to benefit from the recent increases in the ex-gas separation plant price for liquefied petroleum gas and in the retail price for natural gas used in for vehicles. These price increases would add about USD490m to its operating cash generation, based on 2014 sales volume.

Capex to Remain High: PTT plans to reduce its capex following the decline in oil prices. The company said it would reduce its original THB327bn capex budget for 2015-2019 at PTT by 9%. However, due to an increase in capex at its upstream subsidiary, PTT Exploration and Production Company Limited (PTTEP), consolidated capex in 2015 will remain higher than in 2014. Given the low proved reserve life, PTT's overall capex flexibility is more limited than many of its peers.

Declining Reserve Life: PTT has lagged significantly behind its peers in reserve replacement and proved reserve life. Its six years of prove reserve life at end-2014 is well below the norm for Fitch's 'BBB' category rated E&P companies. The company has a much larger unproved and contingent resource base, which requires significant investment and time to develop. Continued decline in reserve life will be negative for its stand-alone credit profile.

National Oil and Gas Company: PTT is dominant in Thailand's oil and gas industry, and plays a policy role in enhancing national energy security and development. It is the sole operator in gas transmission and distribution, and off-takes and resells nearly all of the natural gas consumed in Thailand. Natural gas is a major fuel for the country's electricity generation. PTT is also one of Thailand's major E&P companies, and a leading oil and petrochemical company.

Mid-Sized Integrated Operator: PTT's standalone credit profile reflects its integrated business model. Its upstream operations - scale, economics, and financial metrics - are comparable with high 'BBB' category peers rated by Fitch, except its reserve life metrics.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Oil prices follow Fitch's global oil and gas price deck outlined in "Fitch Oil and Gas Assumptions Summary", dated 11 February 2015
- Sales volumes of the E&P business increase by 6% in 2015, but EBITDA to decrease due to lower oil and gas prices.
- Capex is 7%-9% of sales in 2015-2017.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an upgrade of Thailand's ratings, provided the rating linkages remain intact

Positive action is not expected on its stand-alone credit profile, given its upstream challenges and the scale of operations.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- a downgrade of Thailand's ratings

Factors that can lead to a negative action on PTT's stand-alone profile include:
- adverse changes to regulations and to gas sales contracts and pipeline tariffs
- large debt-funded investments and/or weaker-than-expected operating cash flow resulting in a sustained deterioration in FFO-adjusted net leverage to over 2.25x (end-2014: 1.2x)
- failure to meaningfully address falling reserve life over the next 18-24 months
- EBITDA from gas mid-stream business below 20% of the total EBITDA on a sustained basis

Should PTT's standalone rating be lowered below that of the sovereign, Fitch would provide a one-notch uplift to its standalone rating on account of the linkages with the state under Fitch's parent-subsidiary linkage methodology.

For the sovereign rating on Thailand, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 5 March 2015.

The main factors that could, individually or collectively, lead to negative rating action are:
- Persistently lower economic growth accompanied by the emergence of macroeconomic imbalances.
- Renewed political instability on a scale sufficient to have a significant impact on Thailand's economy.
- A sharp and sustained rise in Thailand's government debt ratios.
- Evidence that contingent liabilities stemming from broader public-sector debts and a highly leveraged private sector will crystallise on the sovereign balance sheet.

The main factors that could, individually or collectively, lead to positive rating action include:
- A pick-up in trend GDP growth above expectations - without the emergence of imbalances - leading to a narrowing of income divergence with the 'A' rating category.
- Resolution of social and political cleavages sufficient in scale to improve governance and development indicators.