Fitch affirms Thai Oil credit ratings

The agency also affirmed the 'AA-(tha)' national long-term rating on Thai Oil's outstanding senior unsecured and unsubordinated debentures amounting to Bt8.5 billion.

The outlook remains stable.

The ratings reflect Thai Oil's strategic and operational links to PTT as a major refinery, its large scale, highly complex production capacity and its cost-competitiveness.

In addition, Thai Oil's forward integration into aromatics and lube-base oil production has increased its oil value chain and reduces the volatility of its refining margins, said Fitch.

Meanwhile, its move into the power business should help partially offset the earnings volatility of the refining business, although the contribution of this to Ebitda (earnings before interest, tax, depreciation and amortisation) is still relatively small.

The ratings are also supported by Thai Oil's strong financial position. Fitch expects the increase in its financial leverage, as measured by adjusted net debt/operating Ebitdar (Ebitda plus rent), in 2008 to be temporary.

With the substantial increase in working-capital requirement for the first nine months due to the spike in oil prices, Thai Oil's net debt rose significantly to Bt44 billion at end-September from Bt28 billion at end-2007. Together with weakened operating Ebitdar and funds from operations, its adjusted net debt to last-12-month (LTM) operating Ebitdar and LTM funds from operations adjusted net leverage increased to two times in the first nine months, compared with 1.1 and one time respectively in 2007.

Nevertheless, with expected lower capital expenditure and working-capital requirements, Fitch expects Thai Oil's financial leverage to reduce in 2009 and 2010. Although the company's operating Ebitdar is projected to remain weak in both years, Fitch expects adjusted net debt/operating Ebitdar to improve to around one time.

The company's key credit weaknesses include its high vulnerability to oil prices and gross refinery margin (GRM) fluctuations, as well as the cyclicality of the petrochemicals business. Thai Oil is also exposed to supply risks, owing to its high dependence on foreign oil supplies.

Also, the oil refinery and aromatics industries are facing cyclical downturns in 2009-2010, driven by the arrival of significant new capacity. A possible sharp decline in demand is likely to intensify the down cycle. Other credit concerns relate to its high customer concentration and its exposure to both a single production site and a single market. However, customer-concentration risk is partly mitigated by the fact that PTT, the largest off-taker, is the dominant company in oil marketing and trading in Thailand and highly rated at 'AAA(tha)'.

The stable outlook reflects the company's relatively strong market position, supported by its cost-competitiveness and a conservative financial policy, said Fitch. Prolonged high financial leverage, in which Thai Oil fails to bring its adjusted net debt to Ebitdar down to one time by 2010 or an average GRM (excluding inventory gains and losses) sustained at below USD3.50 (Bt122) per barrel for 18-24 months, could negatively affect the ratings.

Thai Oil is the largest single-

site and the most complex oil refinery in Thailand, with a current nameplate capacity of 275,000 barrels per day, accounting for 25 per cent of the nation's refining capacity.

The company is 49.1 per cent owned by PTT, the largest fully integrated oil and gas company in Thailand, with the remaining shares publicly owned.