Fitch Ratings has affirmed Thailand's PTT Exploration and Production Public Company Limited's (PTTEP) Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable.
The IDR is based on PTTEP's 'bbb+' Standalone Credit Profile (SCP), which is on par with the IDR of its 65% parent, PTT Public Company Limited (PTT, BBB+/Stable). The SCP is driven by PTTEP's conservative financial profile and strong operating profile, supported by credit-accretive acquisitions and contract wins in the last few years that have boosted its reserve profile and scale.
The company lowered its reserve life target to five years in 3Q21, from seven years. We might reassess the SCP upon a significant drop in the reserve base, but PTTEP's rating will remain equalised to that of PTT should its SCP weaken, in line with our Parent and Subsidiary Linkage Rating Criteria. This is based on our assessment of PTT's high strategic and operational incentives to support PTTEP.
KEY RATING DRIVERS
Rising Production: We expect PTTEP's operating profile to remain strong over the medium term, with its production scale expanding by 5%-8% a year. Growth in the next two years is likely to be driven by planned production increases at the Erawan and Bongkot projects (G1/61 and G2/61 PSC). We believe PTTEP has a robust pipeline of upcoming projects, allowing it to maintain its production growth, including the expected final investment decision on its Malaysian Lang Lebah project in 2023.
PTTEP's production scale climbed by about 18% in 2021, reaching 416,000 barrels of oil equivalent per day (boepd) (2020: 354,000 boepd), on account of its Oman Block 61 acquisition and the start of production at its Malaysian Sabah asset.
Declining Reserve Life Over Medium Term: We expect PTTEP's reserve life to decline over the next three to four years as its production rises and it moves closer to its revised reserve life target of over five years. PTTEP's reserve base has improved since 2019 from inorganic growth via acquisitions. Its reported proved reserves of 1,350 million barrel of oil equivalent (mmboe) at end-2021 translate into a reserve life of 8.9 years based on 2021 production. We estimate proved reserves will remain adequate for its SCP in the next two to three years given its organic investment plans.
Lower Earnings Volatility: PTTEP's gas sales prices are mostly linked to the average of crude price indices in the past six to 24 months, reducing earnings volatility compared with oil and gas peers. About 70% of its production comprises gas and the remainder oil. PTTEP's gas volumes are relatively stable, benefitting from long-term take-or-pay contracts. We expect the volume contribution from gas to increase to about 75% in 2026, when the Lang Lebah gas project starts commercial production.
High Upstream Capex: We expect capex, which is mainly driven by PTTEP's upstream segment, to stay high, at about USD3.4 billion-3.8 billion a year for 2022-2025 due to various investment commitments under production sharing contracts. It also aims to maintain production at its mature domestic fields. Capex in the next two years will be driven by required investments at the Erawan and Bongkot projects (G1/61 and G2/61 PSC), where PTTEP has committed to boosting production to 800 million and 700 million standard cubic feet per day, respectively.
Energy-Transition Investment to Increase: We expect a pick-up in PTTEP's energy-transition investments as it looks for opportunities as part of its 'Beyond Exploration and Production' strategy. However, these investments are likely to remain small, with total committed capex of USD88 million over the next five years. The company, however, has a substantial provisional budget of USD4 billion towards the strategy for 2022-2026. We believe PTTEP's strong financial profile will support these investment plans once finalised.
Conservative Financial Profile: We expect the company to maintain a strong financial profile, with FFO net leverage of less than 0.2x through to 2026 (2021: 0.3x) in the absence of major acquisitions. The currently strong oil prices should drive PTTEP's robust positive free cash flow during 2022 and 2023, despite its large investment plans, helping it maintain ample headroom for its SCP.
DERIVATION SUMMARY
PTTEP's rating compares well with that of US-based Pioneer Natural Resources Co. (BBB+/Stable). Pioneer has a larger scale of 638,000 boepd and proved reserves of about 2.2 billion boe. However, this is offset by PTTEP's lower earnings volatility and better geographical diversification. Both PTTEP and Pioneer have conservative financial profiles.
PTTEP's is rated at the same level as Devon Energy Corporation (BBB+/Stable), which has higher production of 567 mboepd. However, this is offset by PTTEP's expanding volume base and better earning stability. The two companies' financial profiles are comparable; we expect net leverage to remain below 0.2x for both during the next four years.
PTTEP's rating is a notch higher than that of Santos Limited (BBB/Stable), due to its stronger financial profile and larger scale in terms of reserves and production. We forecast production at Santos to reach 290 mboepd after its merger with Oil Search, which has proved reserves of 1,009 mmboe. Santos also has relatively stable earnings, supported by its large share of liquefied natural gas-linked revenue, which is typically based on long-term oil-linked contracts, and its domestic gas business, where volumes are usually sold on long-term fixed-price contracts. We expect Santos' FFO net leverage to reach 2.0x-2.2x in 2024-2025, before factoring in the potential sell down of equity interests among its projects to optimise its portfolio.
KEY ASSUMPTIONS
Benchmark Brent Crude at USD105/barrel (bbl) in 2022, USD85/bbl in 2023, USD65/bbl in 2024 and USD53/bbl thereafter.
Gas selling price of USD6.4/million British thermal units (btu) in 2022, USD6.1/million btu in 2023, USD5.6/million btu in 2024 and USD5.1/million btu in 2025
Production volume to increase by 9% in 2022. Marginal growth thereafter.
Capex of USD3.4 billion in 2022, USD3.6 billion in 2023, USD3.8 billion in 2024 and USD3.6 billion in 2025
Decommissioning expenses of over USD400 million in 2022 driven by the Bongkot project
A dividend payout ratio of 50%
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Any upgrade in the parent's IDR, provided linkages remain intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of PTT's IDR.
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: PTTEP's liquidity is supported by its cash and cash equivalents of THB86 billion, against short-term debt of THB15 billion and total debt of THB120 billion as at end-2021. We expect PTTEP's cash generation to broadly cover capex over the next four to five years, allowing it to remain free cash flow positive. PTTEP's access to domestic and international debt markets further support its liquidity.
ISSUER PROFILE
PTTEP is Thailand's national petroleum exploration and production company. It is part of Thailand's PTT group and is the group's flagship upstream entity. The company has key projects in Thailand, Malaysia, Myanmar, Mozambique, UAE and Algeria.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
PTTEP's IDR reflects its SCP, which is at the same level as the rating on its parent. However, given our assessment of linkages with its parent, PTTEP's IDR will be equalised with that of PTT if its SCP weakens below the parent's rating. Any change in PTT's rating will automatically result in a change in PTTEP's rating.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com