TRIS Rating has affirmed the company rating of PTT Exploration and Production PLC (PTTEP) and the ratings of PTTEP’s senior unsecured debentures at “AAA”. TRIS Rating has also affirmed the rating of “AA” to PTTEP’s subordinated capital debentures (hybrid) with “stable” outlook. The two notches below the corporate credit rating reflect the deferability and subordinated nature of the capital debentures.
The ratings affirmation reflects PTTEP’s financial flexibility and its ability to reduce capital expenditures as well as operating expenses in response to low oil price environment. PTTEP's ratings also take into consideration the company’s leading position in the petroleum exploration and production (E&P) industry in Thailand, its solid asset base, the support it receives as the E&P arm of the national oil and gas company, and strong financial profile. Low petroleum prices and the execution risk PTTEP face in its overseas operations remain rating concerns.
The “stable” outlook reflects TRIS Rating’s expectation that PTTEP will be able to maintain its strong financial position amid very challenging market conditions. The company’s ability to rationalize capital expenditures (CAPEX) and its ample liquidity will help PTTEP weather the current downturn in the petroleum industry.
PTTEP’s credit downside may arise if crude oil prices stay below US$30 per bbl for a prolonged period and if PTTEP’s financial leverage increases significantly due to any large debt-funded acquisitions.
PTTEP is the leading petroleum E&P company in Thailand. The company was established in 1985 to hold petroleum concession rights on behalf of the Thai government. As of February 2016, PTT PLC (PTT), the national oil and gas company, held a 65.3% stake in PTTEP. Both PTT and PTTEP are state enterprises. As the E&P arm of PTT and the Thai government, PTTEP can participate in petroleum projects with high potential, both in Thailand and abroad. As of December 2015, the company had 38 E&P projects across 11 countries. Almost two-thirds, or 24 projects, were in the production phase, while the remainders were in the exploration and development phases.
PTTEP’s business profile is very strong. In 2015, PTTEP's production volume increased by 4.1% to 373,888 barrel of oil equivalent per day (boed) from 359,259 boed in 2014. The increase reflected the full year contribution from the Zawtika project in Myanmar, increases in PTTEP's ownership stakes from the acquisitions of the Contract 4 and Sinphuhorm projects in April 2014, and the startup of the Ber Seba project in the fourth quarter of 2015. At the end of 2015, PTTEP owned proved petroleum reserves of 738 million barrels of oil equivalent (mmboe). At the production rate achieved in 2015, PTTEP’s proved reserves will last about five years. However, PTTEP holds large petroleum resources of about 5,039 mmboe (including proved reserves). If PTTEP finalizes its decision to develop the liquefied natural gas (LNG) project in Mozambique, some of the petroleum resources will be converted to proved reserves. PTTEP will gain one to two years of proved reserves, based on the production rate in 2015.
For 2015 operation, oil prices continued to drop, pressuring the company's performance. The price of Dubai crude oil dropped by almost 50% from an average of US$96.6 per barrel in 2014 to US$50.9 per barrel in 2015. PTTEP's average selling price decreased by 28.9% from US$63.7 per barrel of oil equivalent (boe) in 2014 to US$45.3 per boe in 2015. The delay drop in the average selling price was due to the gas price adjustment that carries a time lag of about three months to one year. The sales of gas accounted for about 70% of PTTEP's sales volume in 2015.
PTTEP responded to the drop in oil price by cutting capital expenditures and reducing operating costs. The company's prompt response to a drop in earnings before interest, tax, depreciation and amortization (EBITDA) preserved its liquidity. In 2015, the company's CAPEX were cut by almost 30% to US$2.1 billion from the original plan of about US$3.1 billion. PTTEP also implemented a cost reduction program. The company's cash cost fell to US$16 per boe in 2015 from US$21 per boe in 2014. This flexibility relieved a pressure on the company's financial profile, as operating cash flow could cover PTTEP's outlays for CAPEX, dividends, and debt repayments.
In 2015, PTTEP’s sales volume increased by 3% from 312,569 boed in 2014 to 322,167 boed. However, due to the lower average selling price, revenue decreased by 27% from US$7,319 million in 2014 to US$5,326 million. The lower average selling price also caused EBITDA to drop to US$4,241 million in 2015. Despite the drop, EBITDA was sufficient to cover debt repayment, CAPEX, and dividend payment. In 2015, the company prepaid Canadian dollar loans of approximately US$361 million. The prepayment gave PTTEP more financial flexibility and strengthened its capital structure. At the end of 2015, the ratio of total adjusted debt to capitalization was healthy at 25.6%.
PTTEP continues to have flexibility to adjust its CAPEX to reflect further drop oil prices. Over 2016-2018, PTTEP's CAPEX is expected to total about US$6.4 billion, down by 14% from the original plan of about US$7.4 billion. PTTEP is rationalizing its planned expenditures so as to maintain production in the main areas in the Gulf of Thailand and Southeast Asia. The recent cut in CAPEX is not expected to deteriorate PTTEP's long-term production capability. PTTEP's revised CAPEX plan incorporates the development cost for the Rovuma Offshore Area 1 project in Mozambique. However, the developments of Mariana Oil sands project in Canada has been deferred and the development plan of the Cash/Maple in Australia has not been finalized. PTTEP’s liquidity is very strong. At the end of 2015, PTTEP had cash on hand and short-term investment of US$3,260 million versus its total debt of US$3,005 million. The company also had unused credit facilities of approximately US$978 million, of which US$554 million was a committed credit line, at the end of 2015.
During 2016-2018, TRIS Rating’s base case expects the company’s EBITDA will be in the range of US$2,500-US$2,800 million per year. This is based on average sales volume of approximately 320,000 boed, and a price of Dubai crude oil about US$35-US$40 per barrel in 2016. CAPEX will total US$6.4 billion over 2016-2018. PTTEP has no debt repayments in 2016 and 2017, but the debt of US$583 million will come due in 2018. Given the expected levels of EBITDA, CAPEX, and debt repayments, the adjusted debt to capitalization ratio is expected to stay below 30% during 2016-2018.
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