The heat is likely to stay on for Thailand's state-owned oil and gas sector. S&P Global Ratings believes a slowdown in earnings won't rein in spending and investment, as exemplified by last month's US$2.5 billion investment into an Omani gas field by a core subsidiary of PTT Public Co. Ltd. (PTT). Higher leverage that could take at least two years to revert to pre-pandemic levels.

These factors led us, last month, to lower the local currency issuer credit rating on PTT to 'BBB+' from 'A-'. Consequently, we downgraded by one notch subsidiaries PTT Exploration and Production Public Co. Ltd. (PTTEP), PTT Global Chemical Public Co. Ltd. (GC), and Thai Oil Public Co. Ltd.

In this report, we address investor questions on the group's credit quality, outlook, and energy transition. To listen to a replay of a webcast on Feb. 10, 2021, please click here.

Frequently Asked Questions

What's behind our recent rating actions on PTT and its subsidiaries?

Weaker earnings coinciding with high spending on committed projects is hurting credit quality. 

The downcycle in refining and petrochemical industries will hamper PTT's consolidated earnings in 2021-2022. The company's EBITDA is unlikely to return to pre-COVID 19 levels of above Thai baht (THB) 300 billion until at least 2022.

At the same time, we believe the integrated oil and gas company has little flexibility to adjust its committed capital expenditure (capex). The recently announced gas field acquisition by PTT's upstream subsidiary, PTTEP, adds more pressure at a time when the group has a weakened balance sheet.

Given these strains, we forecast PTT's leverage will remain elevated, with a ratio of debt-to-EBITDA above 2.0x over the next one to two years. This led us to lower the stand-alone credit profile (SACP) to 'bbb' from 'bbb+' in early February 2021.

What is included in S&P Global Ratings' base case for PTT's capex plans?

We estimate a capex plan of about THB650 billion over 2021-2023 which includes PTT's investments in its fifth onshore pipeline, liquefied natural gas terminal, and gas separation plant. 

Our base case also factors in:

• PTTEP's exploration and production expenses in Thailand and overseas (i.e. Mozambique, Algeria, Vietnam, and Malaysia);
• Thai Oil's ongoing spending on its clean fuel project, and GC's efficiency enhancement project.
• The publicly disclosed plans on Ultra Clean Fuel Project at IRPC Public Co. Ltd. (not rated), PTT's specialty chemicals flagship.
• Capacity expansion at Global Power Synergy Public Co. Ltd. (GPSC).

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We have yet to factor in other potential large projects. The company has yet to reach a final investment decision on PTTEP's gas-to-power project in Myanmar, GC's ethylene cracker in the U.S., IRPC's aromatics expansion project, and the group's investment in renewables. We also have not factored in any sizable acquisitions.

At 'bbb', the SACP has some cushion against an increase in capex. By our assessment, the company's debt-to-EBITDA approaching 3.0x could signal further weakening in PTT's stand-alone creditworthiness.

Why did S&P Global Ratings only lower the local currency ratings on PTT in its actions last month?

In short, because the foreign currency (FC) rating was already lower than the local currency (LC) ratings, and thus unaffected by change in the SACP. 

Our issuer credit ratings on PTT reflect the company's SACP of 'bbb' plus one notch of uplift due to our assessment of an extremely high likelihood of government support in the case of distress.

We currently have a 'BBB+' foreign currency (FC) and local currency (LC) issuer credit rating. Previously, we had a higher 'A-' LC rating on PTT. This in turn reflected the difference in the Thailand FC sovereign rating, at 'BBB+', and the LC sovereign rating, at 'A-'. In effect, the FC ratings on PTT were already capped at 'BBB+' and thus unaffected by our lowering of SACP to 'bbb'.

For government-related entities such as PTT that have an extremely high likelihood of government support, we typically require the company to maintain a minimum stand-alone creditworthiness of 'bbb+' in order for the LC issuer credit ratings to be equalized at the same level as sovereign, 'A-'.

Our sovereign LC rating on Thailand is higher than the FC one because we view Thailand's monetary policy as independent with a floating exchange rate. In addition, Thailand's well-developed local currency bond market awards the government greater ability to conduct monetary policy and enables it to meet its financing requirements at very low costs. Consequently, default risks apply differently to foreign- and local-currency debt.

Why did we lower the LC issuer credit rating on PTTEP but not the FC rating or its SACP?

This reflects our actions on the parent, PTT, where we lowered only the LC issuer credit ratings. We consider PTTEP as a core subsidiary of PTT, and its local and foreign currency ratings are equalized at that of its parent.  

In our view, PTTEP's SACP of 'bbb' can accommodate the subsidiary's acquisition of a gas field in Oman, known as Block 61. This is because of PTTEP's revenue visibility backed by long-term gas sales contracts and its low-cost position. The company also has a sizable weighting in natural gas, which is less volatile than oil prices.

The Omani acquisition will raise PTTEP's debt-to-EBITDA ratio to about 1.3x in 2021, from 0.8x-1.0x over the past few years. From 2022, full-year earnings accretions from Block 61 will subsequently temper the impact on PTTEP's leverage. As such, we project PTTEP's debt-to-EBITDA ratio will remain below PTTEP's 1.5x downside trigger through 2023, barring additional sizable acquisitions.

Why were GC and Thai Oil get downgraded in line with our recent action on PTT, but not GPSC?

GPSC does not, in our view, have the same level of strategic importance to PTT as does GC and Thai Oil. As such, the ratings do not move as closely. 

We view GC and Thai Oil as PTT's highly strategic subsidiaries, hence the issuer credit ratings are one notch below the group credit profile. This reflects our view of: (1) the parent company's creditworthiness; (2) the parent's relationship with the government; and (3) the subsidiary's relationship with the parent. Therefore, our lowering of the LC issuer credit rating on PTT resulted in downgrade for both GC and Thai Oil.

We expect GPSC to remain a strategically important subsidiary to PTT. We assess GPSC's group relationship to be weaker than that of GC and Thai Oil because GPSC has lower operational integration with the wider group, and contributes a lower proportion of the group's consolidated earnings. In addition, GPSC is unlikely to receive any indirect support from the government through the parent company. This is given GPSC's smaller installed capacity compared with that of government-owned power producers. The issuer credit rating on GPSC is therefore benchmarked solely with PTT's SACP and capped at one notch below PTT's SACP.

Thai Oil's credit standing is heavily reliant on the parent. Will the relationship be maintained, given Thai Oil's rising leverage?

Yes.   In our view, PTT is incentivized to support Thai Oil in the event of financial stress, even though Thai Oil's investment in its Clean Fuel Project has increased its leverage beyond PTT group's tolerance level. This is because the project will increase Thai Oil's refining capacity by 45% upon the completion in late 2023, from 275,000 barrel per day to 400,000 barrel per day, boosting the subsidiary's earnings contribution to PTT.

We assess Thai Oil as a highly strategic subsidiary to PTT. We could reassess Thai Oil's highly strategic status in the event of weaker integration with the parent or should PTT significantly reduce its 45% stake in Thai Oil. For example, the termination of PTT's crude supply or product off-take agreement could signal potential weakening parent support between PTT and Thai Oil. We do not foresee such moves over the next two years.

Does PTT's weaker creditworthiness imply that the company is deviating from its conservative financial policy and commitment to maintain the rating level?

We think PTT is still committed to its credit quality, but, in our opinion, financial discipline will be harder to achieve over the next one to two years.   The resilience of the group's consolidated earnings is being tested by low demand in refining products and oversupply in the petrochemicals sector. The company's net debt is currently at an all-time high, driven by elevated spending. In our view, the company's leverage is unlikely to knock up against our downgrade trigger of 3.0x and above. However, it may miss the company's goal of a ratio of 2.0x.

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We envisage a period of elevated spending for the PTT Group.  This implies PTT will need to pursue cash preservation measures or reduce other spending (i.e. operating expenses or dividends) to accommodate higher capex and preserve its creditworthiness. We believe it will be more difficult for PTT to significantly curtail investment over the next decade. In addition to the ongoing committed spending, the group will have to continue to invest to maintain its reserves profile and enhance efficiency in its downstream business to maintain its competitiveness in the hydrocarbon sector.

We also anticipate PTT will be required to pursue future investment beyond what is captured by our base case, in addressing rising environmental, social, and governance (ESG) awareness and the broader global energy transition

What is PTT Group doing to address energy transition and how does this align with the company's strategy?

To address the energy transition, PTT Group plans to increase its exposure in renewable energy, invest in electric vehicles (EVs) facilities and energy storage business.  PTT will also look to exit the coal business by the end of 2021; however, we expect the earnings impact will be immaterial given PTT's modest exposure.

PTT Group plans to reach 8 gigawatts in renewable energy by 2030 from about 600 megawatts (MW). In our view, GPSC (31.7% owned by PTT) could be a key channel for the group's future investment into renewables. GPSC's exposure in renewables account for 12% of its committed 5,055MW equity capacity, or about 600MW. The company aims to increase the renewables proportion to 30% of its committed capacity within five years through Global Renewable Power Co. Ltd. (50% owned by GPSC, and 50% owned by PTT Global Management Co. Ltd, a wholly owned subsidiary of PTT). GPSC will co-invest alongside the PTT group in renewable investments.

Chart 3

In addition, PTTEP (63.8% directly owned by PTT and 1.5% owned by PTT's wholly owned Siam Management Holding Co. Ltd.) is exploring an investment opportunity in wind or solar energy, with the scope and size of any potential investment yet to be disclosed.

We also expect the PTT Group to participate in the adoption of EVs in Thailand over the next decade. The country has issued various tax incentives for the development and production of EVs and EV facilities, with a roadmap to produce about 1.2 million EVs by 2036, from about 150,000 EVs as of 2020. To address increasing demand for charging stations, PTT plans to operate about 100 EV charging stations by the end of 2021, leveraging on nationwide gas station network of PTT Oil and Retail Business Public Co. Ltd. (PTTOR; 74% owned by PTT at the time of IPO and subject to change post over-allotment exercise). PTTOR is currently offering free EV charging facility in 25 locations of its gas stations as part of a trial project. The company has 1,997 retail stations in Thailand, as of Dec. 31, 2020.

The adoption of renewables and EVs will also support the demand for efficient energy storage, in which the PTT Group has some exposure via GPSC's 26.0% ownership in 24M Technologies, Inc., a lithium-ion battery manufacturer. However, the group is unlikely to generate material revenues from this segment over the next two to three years, given that 24M Technologies is yet to enter a commercial stage.

In addition to new business segments, climate and greenhouse gas emission risks will translate into higher spending to comply with more stringent environmental practice and regulations. Thai Oil and IRPC's clean-fuel projects are examples of sizable investments aimed at addressing stricter European emission standards.

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Related Research

• PTT Public Co. Ltd. Local Currency Rating Lowered To 'BBB+'; Foreign Currency Rating Affirmed; Outlooks Stable, Feb. 9, 2021.
• PTTEP Local Currency Rating Lowered To 'BBB+' From 'A-'; Outlook Stable; 'BBB+' Foreign Currency Rating Affirmed, Feb. 9, 2021.
• PTT Global Chemical Downgraded To 'BBB' On Parent's Weakening Creditworthiness; Outlook Stable, Feb. 9, 2021.
• Thai Oil Downgraded To 'BBB' On Parent's Weakening Creditworthiness; Outlook Stable, Feb. 9, 2021.