OREANDA-NEWS. Fitch Ratings (Thailand) has assigned PTT Public Company Limited's (PTT: AAA(tha)/Stable/F1+(tha)) upcoming up to THB4.2bn senior unsecured debentures due 2021 a National Long-Term Rating of 'AAA(tha)'. The proceeds will be used to refinance debt.

The notes are rated at the same level PTT's National Long-Term rating as they constitute direct, unsecured, unconditional, and unsubordinated obligations of the 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. However, we expect PTT's FFO-adjusted net leverage to remain below 2.5x in 2015-2016.

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. PTT generated EBITDA of THB23.6bn from the gas mid-stream business in 1H15, down by 18% yoy, due to lower prices for products from the gas separation plants. We expect PTT's cash generation to benefit from the recent increases in the ex-gas separation plant price for liquefied petroleum gas and the retail price for natural gas used in vehicles.

EBITDA from the exploration and production (E&P) operations was THB70.0bn in 1H15, down by 21% yoy. The decrease was smaller relative to other E&P operators because 70% of its sales volumes were derived from natural gas. While gas prices realised by its upstream operations have been negatively affected by lower oil prices, the magnitude of the price reduction has not been as severe as the drop in oil prices. Much of its natural gas is sold locally under long-term contracts.

Capex to Remain High: PTT has reduced its capex budget for 2015-2019 to THB299bn following the decline in oil prices. Its upstream subsidiary, PTT Exploration and Production Company Limited (PTTEP), has also reduced capex in 2015 by 14%. However, Fitch expects PTTEP's capex for 2015-2019 will remain relatively high. PTT has less overall capex flexibility than many of its peers because of its low proved reserve life.

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 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 standalone 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

Negative: Future developments that may, individually or collectively, lead to negative rating action 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 (A-) be lowered below that of the sovereign's Long-Term Local-Currency Issuer Default Rating (A-/Stable), 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.