OREANDA-NEWS. Fitch Ratings has downgraded Thailand-based PTT Public Company Limited's (PTT) Long-Term Local-Currency Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Outlook is Stable. This follows the downgrade of Thailand's Long-Term Local-Currency IDR to 'BBB+' from 'A-' with Stable Outlook on 22 July 2016 - see Fitch Reviews Thailand's Ratings, Applies Criteria Changes.

At the same time, the agency has affirmed PTT's Long-Term Foreign-Currency IDR at 'BBB+', Short-Term Foreign-Currency IDR at 'F2', National Long-Term rating at 'AAA(tha)' and National Short-Term rating at 'F1+(tha)'. The Outlook is also Stable. The National Long-Term Rating on its senior unsecured debentures has been affirmed at 'AAA(tha)'.

PTT's standalone credit profile of 'BBB+' is now the same as Thailand's Long-Term Foreign - and Local-Currency IDR of 'BBB+' with Stable Outlook.

KEY RATING DRIVERS

Upstream Profile Weakens: PTT's proved reserves have continuously deteriorated to levels worse than that of upstream peers rated in the 'BBB' category. Fitch expects the segment's operating cash flows to decline in 2016, even though its leverage and that of PTT as a whole remains low and liquidity is solid.

PTT's Integrated Profile: PTT's ratings reflect the company's integrated business model and stability of its overall risk profile from large and generally stable mid - and downstream-operations. These operations have buffered the company against large earnings deterioration in its upstream operations since 2H14.

Stable Cash Flow from Gas: PTT's financial profile benefits from relatively stable cash-flows from its natural gas business, which is underpinned by steady demand and long-term supply and sales agreements with take-or-pay conditions on a cost-plus-pricing structure.

Earnings from the gas business have fallen along with oil prices. Margins of natural gas sales to industrial users and gas products from the gas separation plants have narrowed, as the cost of contracted gas purchases lags the fall in product prices. We expect this situation to improve as the cost of gas is repriced over time and oil prices recover.

Credit Metrics to Weaken: We expect PTT's FFO-adjusted net leverage to rise to about 1.7x in 2016 (2015: 1.3x) based on our forecasts of lower operating cash flows, even though the company plans to cut capex by about 15% for 2016. Fitch does not expect positive free cash generation for the next two to three years, but forecasts leverage to remain below 2.25x based on FFO-adjusted net leverage.

National Oil and Gas Company: PTT is dominant in Thailand's oil and gas industry and plays a policy role in enhancing national energy security and development. It is the sole operator in the nation's natural gas transmission and distribution business: it buys gas wholesale from producers and resells nearly all the natural gas consumed in Thailand. PTT is also one of Thailand's major exploration and production companies and a leading oil and petrochemical company.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- crude oil prices (Brent) of USD35 per barrel (bbl) in 2016, USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl thereafter

- flat sales and production volumes from the exploration and production business in 2016, with EBITDA falling due to lower oil and gas prices

- soft EBITDA from the gas business in 2016

- falling but healthy EBITDA from the petrochemical and refining business in 2016, due to weakening product-to-feed margins

- capex of 10%-12% of sales in 2016-2017

- no mergers or acquisitions, although financial headroom for some mergers and acquisitions exists.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- an upgrade of Thailand's IDRs, provided rating linkages remain intact.

Positive action is not expected on PTT's standalone credit profile over the next 18-24 months due to weaknesses in the company's upstream operations, especially the reserve profile.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- a downgrade of Thailand's ratings.

Factors that may lead to negative action on PTT's standalone profile include:

- large debt-funded investment or weaker operating cash flow resulting in a sustained deterioration in FFO-adjusted net leverage to over 2.75x

- a weakening financial profile of its upstream operations, FFO-adjusted net leverage above 2.5x and failure to address declining reserve life in the medium-term

- adverse changes to regulations, gas sales contracts or pipeline tariffs.

Fitch will provide a one-notch uplift to PTT's IDRs if its standalone rating falls below Thailand's Long-Term IDRs of 'BBB+' to reflect support from its parent, the Thailand government, under Fitch's Parent Subsidiary Linkage methodology.