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Fitch Affirms Thailand-Based PTT at 'BBB+'/'AAA(tha)'; Outlook Stable

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Bangkok--30 Apr--Fitch Ratings

Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' and its National Long-Term Rating at 'AAA(tha)'. The Outlook is Stable.

The affirmation reflects PTT's Standalone Credit Profile (SCP) of 'bbb+', which is at the same level as the Thai sovereign rating (BBB+/Stable). PTT's ratings will remain equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria if the company's SCP weakens, provided our assessment of PTT under the criteria remains unchanged. PTT's SCP reflects its integrated business model and strong financial position.

KEY RATING DRIVERS

Strong Likelihood of Support: Fitch regards PTT's status, ownership and control by the sovereign as 'Moderate'; the state directly owns 51% of PTT and appoints its board. We see the support record and expectations of state support as 'Strong'. There has been no explicit tangible financial state support due to PTT's strong financial position, but we believe support would be forthcoming, if needed, in light of PTT's strategic role in Thailand's oil and gas sectors.

We believe the socio-political implications of a default by PTT are 'Strong', as a default would significantly affect gas availability in Thailand, which in turn could cut electricity generation and lower the country's energy security. We also see the financial implications of a default as 'Strong', as a default could limit domestic and foreign financing options and increase financing costs for the state and government-related entities.

Earning Pressure: PTT will face downward pressure on its credit metrics in 2020 because of lower oil and petrochemical prices, which are likely to dampen earnings from its gas-separation plants and natural gas sales to industrial users. We also forecast weaker operating cash flow caused by lower demand as a result of coronavirus pandemic-related disruption in the downstream refining and petrochemical business. Operating cash flow should improve in 2021, along with a general rise in demand, once the pandemic is resolved, but is likely to remain below 2019 levels.

We expect PTT's operating cash flow from upstream operations to decrease by less than our expected fall in crude oil prices due to high natural gas sales (71% of volume) and some hedges of its oil production at higher prices. The selling price of natural gas is about 30% indexed to fuel-oil prices; it takes about three to 24 months to adjust, depending on the gas-supply contract.

SCP Headroom to Reduce: Fitch expects PTT's financial profile to stay adequate for its 'bbb+' SCP, although headroom is likely to shrink. We forecast PTT's FFO net leverage to weaken to about 2.5x in 2020 (2019: 1.6x) and improve towards 2.0x over the medium term.

Some Flexibility on Capex: Fitch expects capex, on a consolidated basis, to rise in 2020 (2019: THB159 billion), driven by investments in subsidiaries. Its downstream subsidiaries have committed projects to complete in 2020-2022, while uncommitted ones are likely to be postponed. Fitch expects capex for downstream subsidiaries of about THB100 billion in 2020. PTT and PTT Exploration and Production Public Company Limited (PTTEP, BBB+/Stable), PTT's upstream arm, have flexibility in their investment plans. PTT has room to reduce capex by 20%-30% in 2020, while PTTEP has about 15%-20%, according to the companies. Both may review medium-term plans if the market fails to recover in 2021.

Improving Upstream Operation: The reserve profile of PTTEP has improved following acquisitions in 2019 and contract wins, although it is still weak against exploration and production companies rated in the 'BBB' category. Its proved reserved life increased to 7.5 years in 2019, from 5.2 years in 2018. The company expects to maintain the reserve life at about seven years over the next three years. PTTEP's production profile has also improved, with rising production forecast for the next five years despite a challenging 2020. PTTEP plans to bring new fields to the production stage, including Sabah H in 2020 and Algeria HBR phase I in 2021. New contracts at the Erawan and Bongkot fields will also drive production in 2022 and 2023.

Integrated Model: PTT's ratings reflect its integrated business model, which helps to smooth out earning volatility over the medium term. Its large mid-and-downstream operation, which includes gas sales and distribution, oil retailing, oil refining and petrochemicals, has provided a buffer against the large earning deterioration in the upstream operations since 2H14.

Stable Cash Flow from Gas: PTT's financial profile benefits from relatively stable cash flow in its natural gas business compared with its oil business. Its natural gas business is underpinned by steady demand and long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. The profitability of its gas transmission and liquefied natural gas receiving terminal operations, as well as the sale of natural gas to power producers and gas-separation plants, are resilient to oil and gas price fluctuations, due to fixed fee and cost-plus pricing. However, the earnings of gas-separation plants and natural gas sales to industrial users are more exposed, as the cost adjustment of gas purchases, which are based on long-term contracts, lag that of product prices.

DERIVATION SUMMARY

PTT is the largest fully integrated oil and gas company in Thailand. It is the sole operator in mid- and downstream gas operations, one of Thailand's major upstream producers, and a dominant player in the oil and petrochemicals industries. We assess PTT's status, ownership and control as 'Moderate', compared with our 'Strong' assessment for Malaysia's Petroliam Nasional Berhad (PETRONAS) (A-/Negative), due to a lower degree of government involvement in PTT's investment strategy and operation. We assess PTT's support record and expectation factor as 'Strong', in line with that of PETRONAS, which has also received only limited tangible financial support in light of its strong financial profile. However, we believe both companies are likely to receive support, if needed.

We assess PETRONAS's and China National Petroleum Corporation's (CNPC, A+/Stable) socio-political implications of default as 'Very Strong', based on their importance to the economy and the state, while PTT's 'Strong' assessment reflects its lower market share in petroleum product sales of around 40% in Thailand, with private operators competing in this space. Fitch assesses the financial implications of default for PTT as 'Strong', compared with 'Very Strong' for PETRONAS and CNPC, because, while PTT is one of Thailand's key government-related entity borrowers, it is not viewed as close to being a proxy government borrower as PETRONAS and CNPC.

PTT's SCP of 'bbb+' reflects its integrated business model and medium-sized operating scale, although it is significantly smaller than that of CNPC and PETRONAS, whose ratings are constrained by their sovereigns. PTT has larger operating scale, in terms of sales and EBITDA, than OMV AG (A-/Negative) and Repsol, S.A. (BBB/Stable), but a slightly weaker reserve profile. PTT has similar credit metrics to OMV, but OMV operates in lower-risk countries. PTT has stronger credit metrics than Repsol.

KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer

Benchmark Brent crude at USD35/barrel (bbl) in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and USD55/bbl thereafterExploration and production business sales volume to increase by about 5% CAGR in 2020-2024 (2019: 15%)EBITDA from the gas, petrochemical and refining businesses to fall in 2020 due to weak demandCapex to increase in 2020-2021 (2019: THB159 billion)Dividend payout at about 50%

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Thailand's IDR, provided the likelihood of support remains intact
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Thailand's ratings
Factors that May Lead to a Deterioration in PTT's SCP:
Large debt-funded investment or weaker operating cash flow, resulting in a sustained deterioration in FFO net leverage to over 2.8xAdverse changes to regulations, gas sales contracts or pipeline tariffs.
Rating Sensitivities for Thailand sovereign
Factors that could, individually or collectively, lead to positive rating action/upgrade:

A resumption of resilient growth without the emergence of imbalancesLower social and political tensions, for instance, reflected by improved governance and development indicators or a record of political stability

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Renewed political disruption on a scale sufficient to negatively affect Thailand's economyA significant and sustained rise in Thailand's government-debt ratios; for example, due to fiscal deterioration or the appearance of contingent liabilities on the sovereign balance sheet

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: PTT's liquidity is supported by available cash of THB309.9 billion at end-2019, against THB94.9 billion of debt maturing within 12 months. Its liquidity is also supported by solid cash flow generation and access to the debt-capital markets and bank funding. PTT's debt maturity profile remains comfortable, with an average term to maturity of 9.2 years.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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