OREANDA-NEWS. 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 notes at 'AA-(tha)'. The Outlook is Stable.

KEY RATING DRIVERS
Strong Balance Sheet: TOP's financial leverage, measured by FFO-adjusted net leverage, has moved back to 1.0x-1.5x in 2015, the levels that were maintained in 2011-2013, from 5.5x in 2014. This has been supported by strong operating cash flows and lower debt requirement for working capital due to low oil prices. Fitch expects its FFO-adjusted net leverage to reduce and stay at about 1.0x-1.25x in 2016-2017, helped by lower capex after the completion of large projects in 2016. This provides larger headroom to weather any drops in refining margin and/or make additional investments.

Low-Cost, Complex Refiner: TOP's ratings reflect its large production size compared with that of its domestic peers; its complex production facilities; and the resultant cost competitiveness and high utilisation rates. Continuous improvements in efficiency and an increase in higher-value products have helped TOP maintain its competitiveness.

Business Diversification: TOP's expansion into aromatics, lube base oil, and solvents has broadened its product range and reduced margin volatility. The start-up of benzene derivative production in 2016 will further increase product range. Fitch expects higher earnings from its power-generation business from 2016 as two new co-generation plants come on stream; although its contribution to overall EBITDA will be small at around 6%-8%.

Highly Cyclical: TOP's credit profile is tempered by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. TOP also has high dependence on its largest shareholder PTT Public Company Limited (PTT (AAA(tha)/Stable) for sales, but this is partly mitigated by PTT's strong credit profile, and by PTT's position as Thailand's main oil marketing and trading company. TOP is also exposed to supply risk, as Thailand is highly dependent on foreign crude oil imports.

One-Notch Uplift from PTT Links: TOP's Long-Term National Ratings incorporate a one-notch uplift from its standalone credit profile. This is to reflect TOP's strategic importance to its 49% owner, PTT. TOP is PTT's key refiner and meets about a third of PTT's requirements for its oil-retailing business.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Crude oil prices (Brent) of USD45 per barrel in 2016, USD55 per barrel in 2017, USD60 per barrel in 2018, and USD65 per barrel thereafter, with TOP's crude procurement costs adjusted for applicable discount;
- Market gross refinery margin to soften in 2016;
- 102% refinery utilisation in 2016-2018;
- Paraxylene (PX) spread to improve but remain weak in 2016;
- Capex to reduce in 2016-2017 from that in 2015.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- FFO-adjusted net leverage sustained 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
- Refining margins and petrochemical spreads sustained at lower-than-expected levels, and/or an increase in debt-funded investments resulting in FFO-adjusted net leverage rising above 1.75x
- Weakening of linkages with PTT.