Fitch Ratings (
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
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
Operating Cash Flow to Recover: We expect EBITDA to double to around
Lower Capex: We expect capex to decrease from 2024 following the completion of PTTGC's Olefin 2
Credit Terms Support Flexibility: We believe the extended credit terms on PTTGC's feedstock purchases from its largest shareholder,
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
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
PTTGC has a stronger business profile than
Key Assumptions
Benchmark Brent crude at
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
Dividend payout of 50% of consolidated net profit
Proportionate consolidation of subsidiary,
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
Issuer Profile
PTTGC is the largest and fully integrated petrochemical and refining company in
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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