Fitch Ratings (Thailand) has revised the Outlook on PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating to Negative, from Stable, and has affirmed the rating at 'AA(tha).

Fitch has also affirmed the senior unsecured rating at 'AA(tha)' and the National Short-Term Rating at 'F1+(tha)'.

The Negative Outlook reflects the risk that EBITDA net leverage, which we forecast at 5x-6x through to 2024, will remain above 3.5x - the level above which we may take negative rating action - in the medium term. The company's earnings have been significantly weaker during the last 12 months than we had expected amid difficult petrochemical market conditions. We believe petrochemical product spreads will stay weak over the next year on lower demand and new petrochemical capacity supply.

The rating remains supported by a two-notch uplift from PTTGC's Standalone Credit Profile (SCP) for parental support.

Key Rating Drivers

Increased Leverage; Slow Deleveraging: We expect a gradual earnings recovery and lower capex to see EBITDA net leverage decline to 5.0x-6.0x in 2023 and 2024, from 12.7x in 2022, but to remain above our 3.5x negative rating sensitivity. EBITDA net leverage should fall to around 3.5x in 2025 on better operating cash flow, but weaker demand or margins than we expect could delay the deleveraging. The high EBITDA net leverage stems from weak earnings and high debt from the 4Q21 acquisition of Allnex Holding GmbH.

PTTGC is considering other options to aid deleveraging. For example, it has already extended its credit terms for crude purchases from its parent to ease working capital requirements.

Weak Petrochemical Spreads: Petrochemical spreads are likely to remain weak through to 2024, despite some recovery from 2022 lows. We expect the slowdown in global economic growth in 2023 to weigh on demand. In addition, new petrochemical capacity additions, mainly in Asia, and high energy prices, although lower than in 2022, are likely to pressure on petrochemical spreads.

Operating Cash Flow to Recover: We expect EBITDA to double to around THB34 billion in 2023 in the absence of hedging losses. PTTGC recorded hedging losses of THB23 billion in 2022, as actual crude and product prices exceeded hedging prices. The company has retained its hedges in line with its policy, and we believe post-hedge spreads will remain aligned with current market prices, limiting large losses for 2023. PTTGC's crude run should also increase in 2023 after a major refinery turnaround in 2022, driving up volume.

Lower Capex: We expect capex to decrease from 2024 following the completion of PTTGC's Olefin 2 Modification Project, which is scheduled to commence operation in 2023, as the company is not likely to commence any large new investments in light of the weak market conditions. We forecast annual capex of THB17 billion-18 billion in 2024-2025, down from our estimate of THB26 billion for 2023.

Credit Terms Support Flexibility: We believe the extended credit terms on PTTGC's feedstock purchases from its largest shareholder, PTT Public Company Limited (BBB+/AAA(tha)/Stable), will provide financial flexibility and liquidity support for PTTGC to help manage leverage. PTTGC had reduced the terms in 2022 due to a planned refinery maintenance shutdown. We expect PTTGC to increase the credit terms to 90 days over 2023 and 2024, which will ease working capital requirement by around THB28 billion.

More Value-Added Products; Diversification: The Allnex acquisition supports PTTGC's strategy to diversify into high-value products and the specialty chemical business. These segments have been more insulated than commodity products during the downturn, due to more resilient end-market demand. The EBITDA contribution from performance chemicals increased to around 22% in 2022 after the acquisition, from less than 5%, helping improve PTTGC's business profile.

Fully Integrated, Low-Cost Producer: PTTGC's large operating scale, wide product range and high utilisation rate result in higher operating cash flow and a wider operating margin than that of domestic petrochemical and refining peers. The company also benefits from cost-competitive feedstock, as the majority of its olefin feedstock is gas-based and available domestically. It also has a favourable gas-supply agreement with PTT, which reduces margin volatility when market conditions fluctuate. PTTGC is PTT group's flagship petrochemical producer.

Medium Support Linkages with Parent: PTTGC's rating incorporates a two-notch uplift from its SCP of 'a+(tha)', reflecting our view that its parent, PTT, has 'Medium' strategic and operational incentives to provide support, based on our Parent and Subsidiary Linkage Rating Criteria. We believe the petrochemical and refinery businesses, of which PTTGC is a major component, are strategically important to PTT. PTTGC is also PTT's major feedstock offtaker.

Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the petrochemical and refinery sectors. The volatility of product-to-feed and refining margins as well as feedstock and oil prices and working-capital requirements significantly influence PTTGC's earnings and cash flow generation. The company is also exposed to supply concentration risk, as the majority of its feedstock is secured from its parent. This is mitigated by PTT's strong credit profile and position as Thailand's leading oil and gas company.

Derivation Summary

PTTGC is PTT's largest petrochemical subsidiary and flagship in the petrochemical business, as evident from the injection of PTT's petrochemical assets into PTTGC in 2017. PTTGC's SCP reflects its operating scale and high integration with petrochemicals, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers, and its financial leverage is also lower.

PTTGC has a larger operating scale, greater integration in petrochemicals and higher profitability than Thai Oil Public Company Limited (A+(tha)/Stable). PTTGC has larger operations and wider diversification than IRPC Public Company Limited (A-(tha)/Negative), as well as a stronger balance sheet and wider operating profit margin.

PTTGC has a stronger business profile than SCG Chemical Public Company Limited (SCGC; A+(tha)/Negative), given its larger operating scale and wider product diversification. PTTGC also has a more conservative financial profile, which results in an SCP that is two notches higher than SCGC's 'a-(tha)'.

Key Assumptions

Benchmark Brent crude at USD80/barrel in 2023, USD75/barrel in 2024, USD70/barrel in 2025, USD65/barrel in 2026 and USD60/barrel in 2027 and thereafter, with PTTGC's crude procurement costs adjusted for applicable premiums

Profitability of petrochemicals to remain under pressure through to 2024, as new supply and weak demand will narrow spreads

Gross refining margin, excluding inventory gains and losses, to soften in 2023

Higher crude run in 2023 on the absence of a refinery turnaround

Extension of credit terms on crude supply from PTT to continue through to 2025

Total capex and investment of around THB67 billion over 2023-2025

Dividend payout of 50% of consolidated net profit

Proportionate consolidation of subsidiary, HMC Polymers Company Limited (A-(tha)/Negative)

RATING SENSITIVITIES

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

The company is not on track to reduce EBITDA net leverage to below 3.5x by 2025

A perceived weakening of incentives for PTT to support PTTGC

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

The Outlook will be revised to Stable if EBITDA net leverage is on track to fall below 3.5x on a sustained basis

Liquidity and Debt Structure

Strong Liquidity: PTTGC had outstanding debt of THB267 billion at end-June 2023, of which THB9.5 billion matured within 12 months. Liquidity is supported by unrestricted cash of THB34.4 billion at end-June 2023. PTTGC has good access to the debt capital market as a result of its close links with PTT and leading market position in Thailand's petrochemical business.

Issuer Profile

PTTGC is the largest and fully integrated petrochemical and refining company in Thailand - with a combined petrochemical and chemical capacity of 14.2 million tonnes a year and crude oil and condensate distillation capacity of 280,000 barrels a day at end-2022.

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

PTTGC's rating incorporates a two-notch uplift from its SCP, reflecting our view that its parent, PTT, has 'Medium' operational and strategic incentives to provide support.

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