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Singapore, June 07, 2012 — Moody’s Investors Service has assigned a provisional (P)Baa1 rating with a negative outlook to the proposed senior unsecured fixed-rate notes to be issued by PTTEP Canada International Finance Ltd, an indirect wholly-owned subsidiary of PTT Exploration and Production Public Company Limited (PTTEP, Baa1 negative).
The proposed notes will be irrevocably and unconditionally guaranteed by PTTEP.
Moody’s will remove the bond rating’s provisional status upon completion of the issuance and satisfactory review of the final documentation.
The proceeds will be used primarily for refinancing and general corporate purposes.
“PTTEP’s Baa1 rating combines PTTEP’s stand-alone rating of Baa2 with a one-notch uplift, reflecting Moody’s assessment of the credit support that its 65.29% parent, PTT Public Company Limited (PTT, Baa1 stable), is likely to provide in the event of distress,” says Simon Wong, a Moody’s Vice President and Senior Analyst.
“Countering these strengths are the rise in PTTEP’s leverage to support its high development capex and its growing appetite for acquisitions,”
adds Wong, who is also lead analyst for PTTEP.
PTTEP’s capex programme is expected to peak in 2012 at USD3.6 billion, resulting in negative free cash flow. Moody’s expects PTTEP’s total adjusted debt to proved developed reserve metrics to range over 10-11x and RCF to Debt of 50%-52% for 2012, which is weak for its current rating.
However, PTTEP’s adjusted EBITDA margin of 64-68%, EBITDA / Interest expense of 25-27x, and Debt to Average Daily Production of
USD14,000-16,000 per barrel projected for 2012 remain well positioned when compared to its international peers.
“At the same time, PTTEP’s acquisition appetite is strong, as evident in its binding cash offer of GBP1.224 billion for the 100% stake of Cove Energy Plc,” adds Wong. Although written consent has been obtained from the government of Mozambique subject to the offer being finalized, the transaction remains subject to the acceptance of Cove’s shareholders.
Cove’s board of directors has recommended that shareholders accept the offer.
“PTTEP’s ambitious strategy to triple its current production by 2020, whether through organic or inorganic growth, may mean downward pressure on its rating. Strengthening of PTTEP’s debt metrics and capital structure, for instance through equity issuance, would help support its current ratings,” adds Wong. PTTEP has a longer-term strategy to triple oil and gas production to 900,000 barrels of oil equivalent per day
(BOED) by 2020.
The one-notch uplift to the final Baa1 rating also reflects PTTEP’s strategic importance within PTT’s energy value chain and their close business integration.
PTTEP’s negative ratings outlook reflects the expectation that PTTEP’s ambitious growth plans could lead to elevated debt which could add considerable pressure to its ratings.
Near-term upward rating pressure is limited, given the substantial development risk that PTTEP faces. However, the outlook could return to stable, if PTTEP’s financial metrics are restored to levels more aligned with the Baa1 rating, which may require an element of equity financing for future growth.
Downward rating pressure would emerge if PTTEP further engages in debt-funded acquisitions, which increase its development risk, or are not immediately accretive to cash flow, leading to: a) total adjusted debt to proved developed reserves of more than 8x, b) retained cash flow
(RCF) to total debt of less than 50%, or c) debt to average daily production of more than US$19,000, on a sustained basis.
The principal methodology used in rating PTTEP was Moody’s “Global Independent Exploration and Production Industry,” published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.