SINGAPORE (S&P Global Ratings) May 12, 2020--Large energy companies in South and Southeast Asia will likely weather through low oil price and margins by tightening their financial policies.
These companies include Thailand's PTT Public Co. Ltd. (PTT; FC: BBB+/Stable/--; LC: A-/Negative/--), PTT Exploration and Production Public Co. Ltd. (PTTEP; FC: BBB+/Stable/--; LC: A-/Negative/--), PTT Global Chemical Public Co. Ltd. (GC; BBB+/Negative/--), Thai Oil Public Co. Ltd. (BBB+/Negative/--); Malaysia's Petroliam Nasional Bhd. (Petronas; FC: A-/Stable/--; LC: A/Stable/--); Indonesia's PT Pertamina (Persero) (Pertamina; BBB/Negative/--) and PT Medco Energi Internasional Tbk. (Medco; B+/Negative/--); and India's Reliance Industries Ltd. (RIL; BBB+/Stable/--), and Oil and Natural Gas Corp. Ltd. (ONGC; BBB-/Stable/--).
S&P Global Ratings expects the credit quality of most of these companies to improve in 2021, after deteriorating in 2020. We expect some companies to cut investments and monetize asset disposals. We also assume Brent oil will rebound to US$50 per barrel (bbl) in 2021, from US$30/bbl in 2020. Concurrently, we anticipate oil refining and petrochemical margins will improve with a recovery in consumption and trade.
Nevertheless, the credit quality of the energy majors could stay suppressed if the COVID-19 pandemic prolongs beyond our expectations, further dampening the oil and derivatives market.
The recent earnings announcements by RIL, Thai Oil, GC, and PTTEP confirm the tough operating conditions for energy companies.
"The extent of hit to the 2020 earnings of the South and Southeast Asia energy majors will depend on their integration, complexity, and diversity of products mix," said S&P Global Ratings credit analyst Shawn Park.
Refiners such as Thai Oil will face more headwinds from lower refining product spreads. The company reported a Thai baht (THB) 9 billion loss in the first quarter of 2020 (excluding THB4 billion inventory loss), compared with a THB7 billion EBITDA a year ago.
Energy companies such as RIL and GC, which have higher complexity and a diversified products portfolio into petrochemicals, will be more resilient given their lower feedstock costs. RIL reported a 5% year-on-year (YoY) growth in EBITDA for the quarter ended March 31, 2020, but energy segment EBITDA (refining and petrochemical) fell 14%. GC's EBITDA for the quarter ended March 31, 2020, declined 35% to THB6 billion (excluding stock loss) on an annual basis. We believe this is a moderate decline compared with industry peers'.
The lagging nature of natural gas prices relative to Brent oil, and PTTEP's secured sales contracts and selling prices that are partially indexed to oil prices should support the company's earnings. PTTEP reported EBITDA of US$1.1 billion for the quarter ended March 31, 2020, a 5% increase YoY.
We expect operating conditions to recover only gradually toward the end of the year. That is because Brent oil prices are persisting below US$30/bbl and year-to-date Singapore oil refining margin are averaging US$0.9/bbl (down 75% YoY). For instance, PTT Group's consolidated EBITDA could contract to about THB250 billion in 2020, following an already weak THB289 billion in 2019. PTT reported THB44 billion EBITDA (excluding inventory loss) in the quarter ended March 31, 2020. We anticipate the group's EBITDA could recover to THB280 billion in 2021, based on our Brent oil price assumption and stabilizing demand. Other energy companies in the region will experience similar trend in 2020-2021, in our view.
Relatively resilient demand for crude oil and related derivatives should support these energy companies' sale volumes. The strengthening U.S. dollar should also cushion the negative impact on earnings. Moreover, we believe these energy majors have several options to mitigate the industry risks.
"In our opinion, South and Southeast Asia energy companies will make temporary production cuts of 5%-10% to prevent further margin erosion. They will also likely look to preserve cash and reduce spending to strengthen their balance sheets," said S&P Global Ratings credit analyst Pauline Tang.
Pertamina, for instance, has announced a reduction in its oil and gas upstream production to 894,000 barrels of oil equivalent per day (boepd) from 930,000 boepd.
Cuts of 10%-20% in capital expenditure (capex) are also likely as companies focus on preserving balance sheets. The PTT Group could drastically lower its budgeted spending; the group has done so in the past. PTTEP, for example, could reduce or defer up to 20% of its announced capex and operating expenses (opex) plan of US$4.6 billion for 2020. Up to 80% of total cuts will come from capex reduction. The company reduced opex and capex to US$2.2 billion in 2016, from US$4.2 billion in 2014, when its average realized price for oil declined to US$41/bbl from US$95/bbl. In our opinion, other PTT subsidiaries such as Thai Oil and GC have limited flexibility to reduce capex, given their committed strategic projects (Thai Oil's Clean Fuel Project and GC's Map Ta Phut Retrofit project). However, they would likely defer other non-strategic investments.
Petronas is likely to maintain its spending on local capex (at Malaysia ringgit [MYR] 26 billion–MYR28 billion). However, some delays in projects are likely. Our base case assumes about MYR50 billion, but considering low oil prices, we believe Petronas could lower its total investment plans for 2020.
Meanwhile, Medco has announced that it will pursue cash preservation measures, including slowing down seismic exploration, delaying projects that incur cost of production above US$30/bbl, and delaying facilities' expansion. This will result in a deferral of US$100 million in capex and potentially opex reduction by US$50 million in 2020.
Some South and Southeast Asia energy majors could consider asset disposals to preserve their balance-sheet strength. RIL has announced the sale of a 9.99% stake in its wholly owned telecom affiliate Jio Platforms Ltd. to Facebook for US$5.7 billion. A rights issuance and other asset monetization plans could help the company garner about US$15 billion in 2020 to deleverage its balance sheet. As of March 31, 2020, RIL's reported net debt was about US$21 billion.
We do not anticipate the PTT Group to materially dispose of its assets, given the group's sizable cash balance of THB328 billion as of March 31, 2020. Yet, the planned initial public offering of PTT's oil retailing subsidiary, PTT Oil and Retail Business Co. Ltd., will provide additional cash to the group, once successfully executed.
These industry headwinds will continue to exert pressure on South and Southeast Asia energy companies' earnings quality. However, most of these companies should weather through it, given their tightened financial policy and balance sheet strength. The ratings on most of these entities (Petronas, Pertamina, PTT, and ONGC) are tied to the respective sovereign ratings. Our rating outlooks on these companies will continue to follow that on the sovereign, provided their relationship with the governments remain intact. Meanwhile, group support and indirect government support (through PTT) underpin the ratings on PTTEP, GC, and Thai Oil, and their ability to withstand the current volatility.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analysts: | Shawn Park, Singapore (852) 2532-8014; shawn.park@spglobal.com |
| Pauline Tang, Singapore (65) 6239-6390; pauline.tang@spglobal.com | |
| Secondary Contacts: | Neel Gopalakrishnan, Singapore + 65-6239-6385; neel.gopalakrishnan@spglobal.com |
| Minh Hoang, Sydney (61) 2-9255-9899; minh.hoang@spglobal.com | |
| Ker liang Chan, Singapore (65) 6216-1068; Ker.liang.Chan@spglobal.com | |
| Media Contact: | Richard J Noonan, Melbourne (61) 3-9631-2152; richard.noonan@spglobal.com |
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