Singapore, February 02, 2021 -- Moody's Investors Service has affirmed PTT Exploration and Production
Public Co. Ltd.'s (PTTEP) Baa1 issuer rating and (P)Baa1
senior unsecured MTN Program rating.
At the same time, Moody's also affirmed (1) the Baa1 rating
on the backed senior unsecured notes issued by PTTEP Canada International
Finance Limited (PTTEP CIF); (2) the (P)Baa1 backed senior unsecured
MTN Program rating established by PTTEP Treasury Center Company Limited
(PTTEP TC); and (3) the Baa1 rating on the backed senior unsecured
notes issued by PTTEP TC. The senior unsecured notes issued by
PTTEP CIF and PTTEP TC are fully and unconditionally guaranteed by PTTEP.
Both PTTEP CIF and PTTEP TC are wholly-owned subsidiaries of PTTEP.
The rating outlook remains stable.
"The rating affirmation reflects our expectation that PTTEP's
credit metrics will remain appropriate for its rating and its liquidity
will remain excellent despite its $2.45 billion all cash
acquisition of a 20% participating interest in Block 61,
a producing onshore gas block in Oman (Ba3 negative)," says
Hui Ting Sim, a Moody's Analyst.
"While the acquisition will significantly reduce PTTEP's cash
reserves that provides a buffer against oil price volatility, this
will be partly offset by an improvement in scale of production and reserves,"
adds Sim, who is also Moody's Lead Analyst for PTTEP.
RATINGS RATIONALE
On 1 February 2021, PTTEP announced that it will acquire a 20%
working interest in Block 61 from BP p.l.c. (A1 negative)
for $2.45 billion. PTTEP will pay an additional fee
of up to $140 million upon the fulfilment of the pre-agreed
conditions in the sale and purchase agreement. PTTEP intends to
fund the acquisition via its large cash holdings -- as at 31 December
2020, the company had $3.8 billion of cash and short-term
investments. Closing of the acquisition is subject to regulatory
approval by the Government of Oman.
Moody's estimates the acquisition will increase PTTEP's proved
and probable reserves by around 20% and sales volume by around
10%. The fixed price nature of the gas sales agreement with
annual price escalation at Block 61 will help to protect PTTEP from the
downside risk of pricing volatility. The transaction will also
modestly reduce PTTEP's strong reliance on its Southeast Asian oil
and gas assets.
The acquisition is in line with the company's target to increase
its proportion of gas production in its product mix to 80%.
PTTEP expects a higher proportion of gas production will position itself
more favorably for energy transition, as the consumption of natural
gas emits lower carbon emissions compared to other hydrocarbons.
Post-acquisition, PTTEP's cash reserves will fall to
an 8-year low below $2 billion, which materially reduces
its liquidity buffers against oil price volatility. The company's
liquidity will be stretched if it fully executes its sizable investment
plan of around $2.5 billion-$3 billion per
annum over the next three years. PTTEP is also closely reviewing
an opportunity to develop a $2 billion integrated gas to power
project in Myanmar, which it targets to reach final investment decision
in early 2022.
Nevertheless, Moody's expects PTTEP to exercise financial
prudence and will have the flexibility to adjust its investment plan if
required. The company has a track record of adjusting its spending
and maintaining excellent credit metrics as well as liquidity through
the oil price cycle, which demonstrates its conservative financial
policy. Negative pressure on PTTEP's standalone credit profile
could arise if the company pursues a more aggressive financial policy,
such as pursuing debt-funded acquisitions or having more tolerance
for lower cash reserves.
Moody's expects PTTEP's adjusted retained cash flow to debt
will remain strong at around 40%-50% in 2022 after
accounting for a full-year of performance at Block 61. The
projection also incorporates Moody's assumptions of (1) Brent averaging
$55 per barrel in 2022; (2) PTTEP spending only about 70%
of its investment plan over 2021-22; and (3) a gradual increase
in PTTEP's adjusted debt to around $5.5 billion in
2022.
PTTEP's Baa1 rating incorporates a one-notch uplift,
which reflects Moody's expectation that its parent, PTT Public Company
Limited (PTT, Baa1 stable), will provide financial support
in times of need. As PTT's upstream arm, PTTEP is strategically
important within PTT's energy value chain. There is also a close
business integration between the companies as more than 80% of
PTTEP's oil and gas sales volume are purchased by PTT.
ESG CONSIDERATIONS
Oil and gas exploration and production companies such as PTTEP are exposed
to very high carbon transition risk. The global trend towards decarbonization
could lower demand for petroleum, which would pressure earnings
for upstream producers over the medium term. In addition,
the growth in domestic consumption of petroleum products over the next
decade will be constrained by Thailand's aging population.
Nonetheless, Moody's expect these risks for PTTEP are partly
mitigated by Thailand's significant dependence on imports of oil and gas,
and the company's production mix, of which over 70% consists
of natural gas.
PTTEP is exposed to contingent liability arising from legal claims from
a number of Indonesian seaweed farmers following the oil spill in 2009
at the Montara oil rig operated by PTTEP Australia, which demonstrates
the implications of operational accidents that upstream producers could
be exposed to. Nonetheless, Moody's does not expect the magnitude
of these legal claims to materially harm PTTEP's credit profile.
In terms of governance considerations, PTTEP's has close links with
its largest shareholder PTT, which provides significant oversight
over the company's financial policy and business strategy. However,
such linkage has been supportive of PTTEP's credit profile in the form
of long-term offtake agreements and other means.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
PTTEP's rating outlook is stable, reflecting the stable outlook
on PTT's ratings and Moody's expectation that PTTEP will continue to generate
substantial operating cash flow from its assets and maintain a prudent
approach towards investments, even as it pursues growth.
Moody's would only upgrade PTTEP's Baa1 issuer rating if PTT's Baa1 issuer
rating is upgraded.
PTTEP's standalone credit profile could improve on stabilization of oil
prices at a higher level and, if the company (1) develops its oil
and gas fields or acquires producing assets, leading to meaningful
additions to its reserves and production volume, thereby further
lengthening its reserve life; (2) further improves its geographic
diversification without increasing its business risk; (3) generates
positive free cash flow, despite high levels of investment spending;
and (4) maintains its strong credit metrics, such that its debt/proved
developed reserves falls below $6 per barrel of oil equivalent
(boe) and retained cash flow (RCF)/debt remains above 40%-45%
on a sustained basis.
Moody's would downgrade PTTEP's issuer rating if Thailand's Baa1 sovereign
issuer rating or PTT's issuer rating is downgraded.
Downward pressure on PTTEP's ratings could also develop if (1) oil prices
remain low for a prolonged period such that there is a significant decline
in PTTEP's earnings and operating cash flow; or (2) the company pursues
a more aggressive financial policy or makes large debt-funded acquisitions
or shareholder returns, resulting in weaker credit metrics.
Credit metrics indicative of downward pressure on PTTEP's ratings include
PTTEP's RCF/debt below 25%-30%, debt/proved
developed reserves above $8 per boe, or EBITDA/interest below
5x.
The principal methodology used in these ratings was Independent Exploration
and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
PTT Exploration & Production Public Co. Ltd. (PTTEP)
is an upstream company engaged in the exploration and production of crude
oil, condensate and natural gas. In 2020, PTTEP had
proved reserves of 1.1 billion boe and reported consolidated sales
revenue of $5.1 billion.
Established by the Petroleum Authority of Thailand — now PTT Public
Company Limited — in 1985 as part of a national energy strategy,
PTTEP is now listed on the Thailand Stock Exchange, with its parent
company, PTT Public Company Limited, retaining a 64.79%
stake in the firm.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Hui Ting Sim
Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
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