Rating Action: Moody's revises Thai Oil's outlook to stable from negative; affirms Baa3 ratingsGlobal Credit Research - 23 Aug 2022Singapore, August 23, 2022 -- Moody's Investors Service has affirmed Thai Oil Public Company Limited's Baa3 senior unsecured debt ratings.Moody's has also affirmed (1) the provisional (P)Baa3 senior unsecured rating on the global medium-term note program co-issued by Thai Oil and its wholly-owned subsidiary, Thaioil Treasury Center Company Limited (Thaioil TC); and (2) the Baa3 rating on Thaioil TC's backed senior unsecured notes, which are unconditionally and irrevocably guaranteed by Thai Oil.At the same time, Moody's has changed the rating outlook to stable from negative."The outlook revision to stable reflects our view that Thai Oil's financial profile will benefit from the buoyant market environment, which will offset some of the pressure stemming from incremental costs for the company's refinery expansion project as well as a delay in its completion," says Hui Ting Sim, a Moody's Assistant Vice President and Lead Analyst for Thai Oil."The rating affirmation reflects our expectation that the company will exercise financial discipline and is committed to maintaining a credit profile commensurate with its investment-grade rating," adds Sim.Thai Oil's Baa3 ratings continue to incorporate two notches of uplift based on Moody's assessment of likely extraordinary support from its parent, PTT Public Company Limited (PTT, Baa1 stable), during a period of stress.RATINGS RATIONALERefining margins in Asia, as indicated by the Singapore-Dubai Hydrocracking margins, have soared this year and averaged at about $19 per barrel from January to the first half of August, compared with around $2 per barrel in 2021. Easing of pandemic restrictions has led to a strong recovery in global demand for transportation fuels. Demand for Asian fuels from Europe has increased further following international sanctions on Russia. Meanwhile, supply has been tight because of significant refinery closures last year, as well as lower export quotas from China.Thai Oil hedges up to half of its annual production to minimize its exposure to the inherent volatility in refining margins. The company was unable to fully benefit from the high refining margins in the first half of 2022 because in prior quarters it entered into hedging contracts on product margins. Even so, despite incurring realized hedging losses of THB16 billion in the first half of the year, Thai Oil generated record EBITDA of THB35.4 billion, already higher than the THB28.1 billion earned in the full year of 2021.Looking ahead, tapering hedging losses and the still buoyant refining margins in Asia will benefit Thai Oil for the second half of 2022. As of 30 June 2022, unrealized hedging losses at Thai Oil were only around THB4 billion. The rating agency estimates that Thai Oil will achieve EBITDA of THB50 billion-THB55 billion and adjusted retained cash flow (RCF) to net debt of around 20%-25% in 2022, increasing from 7% in 2021.The total cost for Thai Oil's refinery expansion, the Clean Fuel Project (CFP) has climbed to $5.3 billion from its original budget of $4.8 billion; a 10% increase. Moreover, completion of the project will also be delayed by around two years with full commissioning expected only in early 2025. While these time and cost overruns are credit negative, the company's higher earnings and cash flow generation will help absorb some of the execution risks associated with a large project such as CFP.Moody's now expects Thai Oil's capital spending to be around $1.1 billion, $760 million and $370 million in 2022, 2023 and 2024, respectively. Under Moody's medium-term crude price range of $50 to $70 per barrel and its assumptions of refining margins at $4 to $6 per barrel, the agency estimates that Thai Oil's RCF to net debt will trend towards 5% to 8% by 2024. Tight supply amid strong demand for refined products indicates that refining margins in Asia are likely to remain above Moody's medium-term assumptions of $4-$6 per barrel over the next 12 months. As such, Thai Oil's pace of deleveraging could be faster than Moody's current expectation should the margin environment remain buoyant.Should the market environment turn more bearish, Moody's expects Thai Oil's reliance on its extended trade payables facility from PTT to rise, limiting an increase in traditional debt. As of 30 June 2022, Thai Oil had drawn down around 30% of its facility amounting to THB15.5 billion.During the second quarter of 2022, Thai Oil divested 10.78% stake in Global Power Synergy Public Company to PTT for THB19.5 billion. Moody's also expects the company to raise around THB10 billion from issuing shares by the end of this year.Thai Oil has excellent liquidity. As of 30 June 2022, the company held cash and cash equivalents of THB40.8 billion and short-term investments of THB3.5 billion. Moody's expects that the company will have sufficient cash sources to fund its scheduled debt maturities, capital spending and dividend payments over the next 12 months.The two notches of parental uplift incorporated in Thai Oil's Baa3 ratings reflect Thai Oil's strategic importance to PTT's downstream oil business as the refinery flagship within the group, and the close business integration between the two companies.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSThai Oil has a highly negative credit exposure to environmental and social risks given the inherent nature of its refining operations in Thailand, which has an aging population. The company's moderately negative credit exposure to governance risk is driven by PTT's concentrated ownership in the company, which allows for PTT to exert significant influence on Thai Oil's strategy and operations.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's will likely consider an upgrade only after Thai Oil achieves full commercial operations at its refinery expansion project and the company materially improves its capital structure.Quantitative metrics indicative of upward momentum on Thai Oil's credit quality include adjusted RCF/debt above 10%-15% and adjusted debt/EBITDA below 3.0x-3.5x on a sustained basis.Moody's could downgrade Thai Oil's ratings if (1) the company's refining and petrochemical margins are lower than the agency's expectation because of constraints from regulatory policies or hedges put in place by the company, or the market environment turns bearish; (2) Thai Oil stretches its balance sheet for capital investments or increases its shareholder returns, which would point toward a more aggressive financial policy; (3) the company faces material operational disruption at its plant or delays in generating earnings from its refinery expansion project; and (4) linkages between the company and its parent change, such that the support assessment incorporated in the ratings is lowered.Quantitative metrics indicative of a downgrade during its expansion phase include adjusted RCF/net debt below 5%-8% or adjusted net debt/capitalization exceeding 54%-56% on a sustained basis.RATING METHODOLOGYThe principal methodology used in these ratings was Refining and Marketing published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74331. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.PROFILEThai Oil Public Company Limited is a refiner and supplier of petroleum products in Thailand. The company operates the largest complex refinery in the country, with a nameplate capacity of 275 thousand barrels per day (bpd), or around 22% of the country's domestic crude refining capacity.As of 30 June 2022, the company was around 48% effectively owned by PTT Public Company Limited (Baa1 stable), which is 51.1% owned by the Government of Thailand (Baa1 stable).REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Hui Ting Sim Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service Singapore Pte. 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