Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB+' and National Long-Term Rating at 'AAA(tha)'.

The Outlook is Stable. The agency has also affirmed the Short-Term IDR at 'F1', the National Short-Term Rating at 'F1+(tha)', and the 'AAA(tha)' rating on PTT's senior unsecured debentures as well as its THB150 billion and THB100 billion medium-term debenture programmes.

PTT's IDRs reflect its Standalone Credit Profile (SCP) of 'bbb+', which is the same as the Thai sovereign rating (BBB+/Stable). PTT's long- and short-term ratings will remain equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria if the SCP weakens, provided our assessment of PTT's strong likelihood of receiving state support under the criteria remains unchanged.

PTT's SCP reflects its integrated business model and robust financial position. We expect the oil and gas and chemical businesses to lead core growth through to 2030, amid the gradual transition into the low-carbon energy business and sectors beyond the energy industry.

Key Rating Drivers

'Very Strong' Incentives to Support: Fitch assesses PTT's role in the preservation of government policy as 'Very Strong' as it plays a key role in the nation's energy security. A default would curtail oil and gas availability in Thailand, affecting electricity generation and weakening energy security. We also assess PTT's contagion risk as 'Very Strong' in the event of a default, as we view PTT as a reference issuer for the state and GREs. A default would have material financial consequence for the state and GREs.

'Strong' Responsibility to Support: We assess the government's decision-making and oversight over PTT as 'Strong', as PTT is 63% directly and indirectly owned by the state. The state has broad control over the business strategy and key investment decisions, although allowing PTT to operate as a commercial entity. We also assess the precedents of support from the sovereign as 'Strong'. We believe the government's support to peer GRE in the power sector, which is considered as important for the country as the energy sector, serves as hints for potential future support to PTT.

Higher Gas Cost for GSP: Fitch believes the profitability of PTT's gas separation plant (GSP) business will decline and be more volatile following an adjustment of the natural gas price structure by government. However, the impact is manageable, as EBITDA from GSP is relatively small at about 6% of consolidated EBITDA for the past three-years average.

The gas cost of PTT's GSP will be adjusted to be based on the single pooled gas price which is an average cost of gas from all sources including liquefied natural gas (LNG). The LNG price is generally higher and more volatile than that of piped gas from the Gulf of Thailand and neighbouring countries. GSP earnings are therefore exposed to more volatile gas costs, in addition to the volatility of product prices.

Moderating, Yet Solid Earnings: We expect EBITDA to soften in 2024, driven by lower EBITDA from the upstream operation on lower oil and gas prices, and lower profitability of the GSP business. However, EBITDA is likely to remain strong at about THB365 billion in 2024 (2023: THB398.7 billion), and above that in 2016-2020. We expect EBITDA from the refinery and petrochemical business to soften slightly in 2024, as petrochemical spreads should remain weak amid uncertain Chinese demand, softening global growth, and an ongoing overcapacity situation. Refining margins are likely to continue to soften.

High Capex: Fitch expects PTT's consolidated capex to remain high, driven by capex in the upstream operation. PTT Exploration and Production Public Company Limited (BBB+/Stable), its upstream subsidiary, has raised its five-year capex plan by about 15%. PTTEP also announced a plan to acquire a 25.5% stake (indirectly) in an offshore windfarm project in Scotland for about USD689 million.

Solid Financial Position: We expect PTT's financial profile to remain robust and well within its ratings, notwithstanding our forecast of rising capex and normalising oil and gas prices. We forecast PTT to generate sufficient cash flow from operations (CFO) to cover most of its capex and investment spending, and therefore EBITDA net leverage is likely to stay at about 1.7x in 2024-2025 (2023: 1.6x).

Integrated Gas Value Chain: PTT's upstream operation focus is on natural gas assets to ensure gas-supply security. The subsidiary PTTEP plans to boost production by a CAGR of 5% over the next five years, to reach output of 808,000 barrels of oil equivalent per day (boed) by 2028 (2023: 638,000 boed). Its focus on natural gas production (2023: 72% of production) bridges conventional and alternative energy sources.

PTT's gas transmission, together with sale and distribution to power producers and GSPs, generates stable cash flow, underpinned by steady demand and long-term sales agreements with take-or-pay conditions on a cost-plus pricing structure. The earnings of natural gas sales to industrial users are more volatile, as adjustments to the cost of gas purchases - which are based on long-term contracts - lag that of product prices. LNG imports are supplied to end-users via LNG receiving terminals and gas pipelines, which are operated solely by PTT, with regulated fixed-fee charges.

Transition Strategy: PTT plans to diversify into future-energy businesses, such as renewable power, energy storage and related systems, the electric-vehicle value chain, and hydrogen. It also intends to enter new businesses, including life sciences, technology and digitalisation as well as logistics and infrastructure. The company expects to raise its renewable capacity to 15GW by 2030. It budgets about 32% of capex for 2021-2030 for future energy and other new businesses, and targets a net profit contribution from these businesses in excess of 30% by 2030.

Derivation Summary

PTT's ratings will remain equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria if the SCP weakens, provided our assessment of PTT's strong likelihood of receiving state support under the criteria remains unchanged.

We assess the impact of a PTT default on the preservation of the government's policy role as 'Very Strong', similar to Indonesia's PT Pertamina (Persero) (BBB/Stable), based on the important respective roles in the oil and gas sector and overall energy security. We also assess the contagion risk to the government should PTT default as 'Very Strong', similar to Pertamina, because we also view PTT as a reference issuer for the financing market relevant to the government.

We assess sovereign support responsibility to PTT as 'Strong', compared with 'Very Strong' for Pertamina, and see tighter government control of Pertamina than of PTT. Pertamina also receives subsidy and compensation reimbursements for meeting the state's public-service obligations, which are approved by the parliament. There has been no financial support to PTT in the past due to its strong financial position, while the government's previous support to PTT's immediate peer GRE serves as hints for potential future support to PTT.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Benchmark Brent crude at USD80/bbl in 2024, USD70/bbl in 2025, USD65/bbl in 2026 and 2027, and USD60/bbl in 2028

Exploration and production business sales volume to increase by about 4% CAGR in 2024-2028 (2023: -1.3%)

EBITDA from the refinery and petrochemical business to soften slightly in 2024

EBITDA from the GSP to reduce in 2024

Capex to increase in 2024-2026 (2023: THB186 billion)

Dividend payout ratio at about 50%-55%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Thailand's IDR, provided the likelihood of support remains intact

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of Thailand's ratings

Factors that May Lead to a Deterioration in PTT's SCP:

Large debt-funded investment or weaker operating cash flow, resulting in a sustained deterioration in EBITDA net leverage to over 2.5x.

Adverse changes to regulations, gas sales contracts or pipeline tariffs.

For the sovereign rating of Thailand, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 13 November 2023:

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Macroeconomic: An improvement in medium-term growth prospects without a significant rise in non-financial private-sector debt.

Public Finances: A decline in the general government debt/GDP ratio; for example, due to smaller fiscal deficits and/or improving medium-term growth potential.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Public Finances: Inability to stabilize the general government debt ratio; for example, due to an extended period of weaker economic growth or continued spending pressures.

Structural Features: Heightened political disruption on a scale sufficient to alter Thailand's economic policymaking effectiveness and growth prospects, or affect its tourism recovery.

Liquidity and Debt Structure

Strong Liquidity: PTT's liquidity is supported by available cash of THB455.1 billion at end-2023, against THB200.4 billion of debt maturing within 12 months. Its liquidity is also supported by undrawn committed bank credit facilities of THB31.1 billion at end-2023, solid cash flow generation, and access to the debt capital markets and bank funding. PTT's consolidated debt maturity profile remains comfortable, with an average term to maturity of about 10 years.

Issuer Profile

PTT is Thailand's integrated national oil and gas company. It operates across the entire oil and gas value chain through its subsidiaries, including upstream, midstream, refining and retail, and chemicals. PTT also diversifies into power generation. PTT is 63% directly and indirectly owned by the Ministry of Finance.

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

PTT's ratings are equalised with those of the Thai sovereign, based on Fitch's GRE criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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