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PTTEP’s potential Cove offer could test limits of its ratings headroom

Singapore, February 28, 2012 — Moody’s Investors Service says that PTT

Exploration and Production’s (PTTEP, Baa1 stable) proposed acquisition of

Cove Energy PLC (Cove) is still in its preliminary phase and therefore

has no immediate rating impact. However, should the company’s decision to

pursue Cove materialize, its ratings could come under pressure, depending

on its chosen method of funding.


On 24 February, PTTEP announced a proposed non-binding cash offer of

GBP1.1 billion for the 100% stake of Cove Energy Plc (not rated). The

offer price is 134% higher than Cove’s share price as of 12 December

2011, the last business day prior to Cove’s announcement of the opening

of the data room to certain parties who expressed an interest in Cove’s

participation in the Mozambique Rovuma Offshore Area 1 Block and a 12.8%

premium over Shell’s (Aa1 stable) offer from 22 February.


While the proposed acquisition is in line with PTTEP’s strategy to expand

its reserve base and increase its long-term production, the deal would be

the company’s second major acquisition in less than 18 months, which in

conjunction with its large ongoing capex, will add considerable pressure

to its rating.


PTTEP’s total adjusted debt to proved developed reserve metrics was 10x

at 31 December 2011, which was weak for its current rating, and already

outside our threshold of 8x. Furthermore, Moody’s expects this ratio to

remain elevated in 2012 due to the large capex program of USD3.6 billion,

resulting in negative free cash flow.


While PTTEP’s current total debt to proved developed reserve metrics are

high, due largely to the ramp-up phase of its KKD project, this is

somewhat offset by ongoing strong retained cash flow (RCF)/total debt and

interest coverage ratios.


Moody’s will evaluate the impact of the acquisition, if and when the

transaction is committed and the financing structure is known. Negative

rating pressure would emerge if PTTEP’s: a) total adjusted debt to proved

developed reserve ratio remains above 8x, b) RCF to total debt falls

below 50%, or c) debt to average daily production exceeds USD19,000, on a

sustained basis.


Furthermore, any negative rating action on PTTEP could also negatively

impact the credit profile of its parent company, PTT PLC (Baa1 /stable),

as PTTEP is a key contributor of earnings and cash flow. The company

generated 56% of PTT’s total EBITDA in 2011.


While PTTEP expects to fund the proposed acquisition using its existing

resources and available credit facilities, its longer term ambitious

strategy to triple oil and gas production output to 900,000 barrels of

oil equivalent per day (BOED) by 2020, in Moody’s view, may require PTTEP

to add equity to its funding mix in support of current ratings.


Cove Energy is a public limited company incorporated in England and Wales,

with upstream E&P interests in Mozambique, Tanzania, and Kenya. Its

principal asset is an 8.5% stake in the Rovuma Offshore Area 1, in

Mozambique, operated by Anadarko Petroleum Corporation (Ba1, review for

possible upgrade) with a 36.5% working interest.


Rovuma Offshore Area 1 has four significant gas discoveries so far. Due

to the significant estimated natural gas resources of up to 30 trillion

cubic feet, Cove is considering a liquefied natural gas project, which

is expected to be operational in 2018.


Cove also has a 10% stake in the Rovuma Onshore Area in Mozambique, as

well as 10%-25% interests across seven blocks in Kenya offshore

deepwater. As at 30 June 2011, Cove had USD174.4 million of cash on hand

and no debt.


The acquisition is subject to three pre-conditions, namely: i) receipt of

written consent from the Republic of Mozambique’s Minister of Mineral

Resources for the proposed transaction, ii) receipt of a unanimous

recommendation from Cove’s Board for the offer, and iii) receipt of hard

irrevocables from Cove’s directors to accept, or vote in favour, of the

offer in respect of their Cove shares.


Under the UK Takeover code, even if the preconditions are fulfilled,

PTTEP has no obligation to make a firm intention to acquire Cove.


PTTEP is engaged in the exploration and production of crude oil,

condensate and natural gas. Established by the Petroleum Authority of

Thailand (now PTT) in 1985 as part of a national energy strategy, it is

now a listed company, with PTT retaining 65.29% ownership.


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