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Rating Action:

Moody's affirms PTTEP's Baa1 ratings following 20% stake purchase in Oman's Block 61

02 Feb 2021

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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