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Moody's: Acquisition of Hess' Thai assets boosts PTTEP's output, reserves

Moody's Investors Service says that PTT Exploration & Production Public Company Limited's (PTTEP) acquisition of Hess Corporation's (Baa2 stable) assets in Thailand, which will boost the company's production and reserves, can be accommodated under its Baa1 issuer and bond ratings with a stable outlook.

On Tuesday, PTTEP announced a $1 billion (Bt31 billion) acquisition of Hess’ producing oil and gas assets in Thailand, comprising a 15 per cent stake in the offshore Contract 4 Project and a 35 per cent stake in the onshore Sinphuhorm Project. Post-transaction, PTTEP will own 60 per cent of the Contract 4 project and 55 per cent of the Sinphuhorm project.

"The $1 billion acquisition cost and related capex of $670 million will add to PTTEP’s already large capex plan of $16 billion for 2014-18 which had been recently reduced from $17 billion as a result from a restructuring arrangement at its Canada KKD oil sands project. However, there is no immediate ratings impact as the acquisition is immediately accretive to PTTEP’s production and reserves and the company is able to fully fund the acquisition cost using its cash balance," says Vikas Halan, a Moody’s vice president and senior credit officer.

As at December 2013, PTTEP had cash and cash equivalents of $2.4 billion after it had issued a $500 million bond in September 2013.

Moreover, PTTEP expects the operating cash flows from these two projects will sufficiently fund the additional capex investment of $670 million over the next 5 years. As a result, cash flow accretion to the company will be modest in the first 5 years. This is PTTEP’s second acquisition since December 2013 where it made a joint 50:50 acquisition of Hess’ 23 per cent interest in the producing Natuna Sea A project in Indonesia. PTTEP’s share of the acquisition cost was $325 million.

"PTTEP’s recent acquisitions have demonstrated the company’s commitment to its strategy of acquiring producing oil and gas assets. However, we will continue to monitor its capex and acquisition plans closely. The company’s credit metrics may weaken beyond our tolerance level if it makes any more sizeable debt-funded acquisitions," added Halan.

PTTEP has an ambitious target to achieve production of 600,000 barrels of oil equivalent per day (boe/day) by 2020 from 329,413 boe/day in 2013. The shortfall may require the company to make further acquisitions.

The offshore Contract 4 project has 2P reserves of 461 million barrels of oil equivalent (mmboe) and is currently producing 387 million cubic feet per day (mmcfd) of natural gas and 17,528 boe/day of condensates.

Sinphuhorm

The onshore Sinphuhorm Project has 2P reserves of 45 mmboe and is currently producing 113 mmcfd of natural gas and 496 boe/day of condensates. The natural gas and condensates at both projects are sold to PTT Public Company Limited (Baa1 stable) under long-term sales agreements.

The Sinphuhorm acquisition has been completed on 22 April. PTTEP expects the full acquisition of Contract 4 to be completed in May 2014.

Downward rating pressure will emerge if PTTEP further engages in debt-funded acquisitions that increase its level of development risk, or if the company invests in assets which are not immediately accretive to cash flow, resulting in: 1) a total adjusted debt to proved developed reserves ratio consistently higher than $8/boe, 2) an RCF to total adjusted debt of less than 50pe rcent , or 3) a total adjusted debt to average daily production of more than $19,000 on a sustained basis.

The rating agency is comfortable with PTTEP’s adjusted debt to proved developed reserves exceeding the $8/boe threshold as its investments in long-dated reserves are not immediately reserve-accretive. However, there would be downward rating pressure if the ratio does not fall below our downgrade threshold in the next 3-4 years.

Upward rating pressure in the next 12-18 months is limited, given the substantial development risks faced by PTTEP.

Positive rating momentum may emerge, if the company reduces its debt leverage such that its total adjusted debt to proved developed reserves is below $6/boe, or if its RCF to total adjusted debt exceeds 70 per cent.

The latter result may be achieved through successful project developments that would lead to additional reserves and growth in production volumes.

The principal methodology used in this rating was the Global Independent Exploration and Production Industry published in December 2011. (See the Credit Policy page on www.moodys.com for a copy of this methodology.)

PTT Exploration & Production Public Co Ltd.(PTTEP) is engaged in the exploration and production of crude oil, condensate and natural gas.

Established by the former Petroleum Authority of Thailand (now known as PTT Public Company Limited) in 1985 as part of the national energy strategy, it is now a listed company, with PTT retaining a 65.29 per cent stake.


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