PTTEP bumped up in Moody’s ratings

Moody’s Investors Service has upgraded PTT Exploration and Production’s (PTTEP) Bongkot gas field acquisition on a credit positive.

Last Wednesday, PTTEP (Baa1 stable) announced its US$750-million (23.6 billion baht) acquisition of an additional 22.2% stake in the Bongkot gas field from subsidiaries of Royal Dutch Shell Plc (Aa2 stable).

Post-acquisition, PTTEP’s ownership in the Bongkot gas field, the largest in the Gulf of Thailand, will increase to 66.7%.

Rachel Chua, Moody’s assistant vicepresident and analyst, said the acquisition is credit positive for PTTEP because it will increase the upstream producer’s volume and reserves.

The company does not require incremental borrowings to fund this purchase and Moody’s expects its credit metrics to remain strong, with retained cash flow and adjusted debt of 65% in 2018, well above Moody’s quantitative guidance of 25% for a rating.

PTTEP was in a net cash position with cash and cash equivalents, including short-term investments of $4.5 billion at year-end 2017, which will more than sufficiently fund the proposed acquisition, Moody’s said.

Assuming the acquisition goes ahead as planned, PTTEP’s proved reserves, known as 1P reserves in the industry, will rise by around 50 million barrels of oil equivalent (boe) or around 8% of its 631 million boe 1P reserves at year-end 2017.

The company also expects the additional Bongkot stake to yield additional sales volumes of 35,000 boe per day. Its sales volume in 2017 was 299,000 boe per day.

PTTEP has sought acquisition opportunities since 2015 to augment its declining hydrocarbon reserves base, which had proved reserves life of only five years at the end of 2017.

Although this acquisition will increase its production and reserves, its proved reserves life will remain largely unchanged. Moody’s expects that PTTEP will have to continue to target growth through acquisitions.

The $750 million pre-tax acquisition price equals $15 per boe of proved reserves.

Production from the field largely consists of natural gas, for which PTTEP’s average selling price was around $5.60 per million British thermal units, or $31 per boe in 2017.

Taking into account cash cost of about $14 per boe, Moody’s estimates that the cash margin at $17 per boe generated per unit of natural gas will be marginally higher than the purchase price as PTTEP is paying for this acquisition, making the leveraged full-cycle ratio of this acquisition just over one time.

Nonetheless, Moody’s believes the full-cycle ratio for PTTEP will improve once the company successfully wins the next round of concessions for the Bongkot gas field and it is able to increase capital spending to convert its probable reserves to proved reserves.

The bidding will likely commence in March and be concluded by October this year. The current concessions expire in 2022-2023.

The parties expect to complete the deal by the second quarter of 2018.

Total S.A. (Aa3 stable) will continue to hold the remaining 33.3% stake in the Bongkot gas field.