Bangkok--20 Nov--Fitch Ratings
Fitch Ratings (Thailand) has affirmed the National Short-Term Rating on ESSO (Thailand) Public Company Limited's (ESSO) bills of exchange revolving programme of up to THB12bn at 'F1(tha)'. Under the programme, the maturity of each series of bills is no more than 270 days.
KEY RATING DRIVERS
Strong Support From Parent: The affirmation of the rating is based on the continued strong financial support from the company's ultimate parent, Exxon Mobil Corporation. ESSO's financial leverage has increased materially due to weak operating margins and trading performance. However, the company has received financial assistance from its parent, in the form of intercompany loans, to ensure ESSO's liquidity requirements are well met. As at September 2014, ESSO's total debt, including loans from the parent was THB37.7bn, up from THB31.6bn at December 2012. The loans from the parent accounted for 48% of total debt at September 2014, compared with 17% at December 2012.
Weak Operating Cash Flows: The profitability of ESSO's refining and marketing operations as well as petrochemicals business deteriorated significantly in 9M14. The refining and marketing segment had an operating loss of THB4.5bn in the 12 months ended September 2014 compared with an operating profit of THB1.17bn in 2013 while its petrochemical operations made an operating loss of THB1.63bn compared with a loss of THB607m in 2013. With the stabilisation of paraxylene (PX) spreads and likely improved refining margins in the next two years, Fitch expects ESSO's operating cash generation to improve from 9M14.
High Financial Leverage: Weak operating cash flows have resulted in higher debt and financial leverage in 2013 and 9M14. Financial leverage, as measured by FFO adjusted net leverage, reached 12.3x in 2013. The expected improvement in operating cash generation will help to bring down leverage, although Fitch expects it to remain very high in 2014-2015.
No Major Capex: Fitch does not expect major capex in 2014-2018 after the completion of the Sriracha Clean Fuels Project in 2011. Capex will be around THB0.6bn-THB1.0bn per year, mainly for maintenance and small efficiency improvement projects.
Still Strong Liquidity: Although ESSO's leverage has materially weakened, Fitch views ESSO's liquidity as adequate. This is largely supported by revolving loan facilities from the ExxonMobil group totalling THB54bn. These facilities will be available until December 2016 and thereafter will be renewable for successive terms of three years. Liquidity is also supported by available uncommitted working-capital facilities of THB16.5bn from financial institutions, and an available revolving bills of exchange programme of THB7.9bn.
Integrated Refiner: The rating also reflects Esso's cost competitiveness arising from its relatively complex refinery capacity and favourable access to raw materials, and its established brand name. The integration of PX production provides a wider product range and optimisation of product lines, and reduces the volatility of refining margins. ESSO also has a strong market position in oil retailing, with Thailand's third-largest market penetration.
Linkages with Parent Company: In addition to the direct financial assistance from ExxonMobil group, ESSO is also able to exploit its parent's worldwide procurement network for purchase of crude oil and refined products, and use ExxonMobil group's technology and engineering services, human resources, and R&D to improve its operational efficiency.
Highly Cyclical Business: ESSO's credit profile is tempered by its high vulnerability to oil prices, refining margin and petrochemical product-to-feed margin as well as high working-capital volatility - which can significantly affect its earnings and cash flow generation. The company is also exposed to single-production-site risk.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Positive rating action is unlikely over the next 12 months, due to the company's expected high leverage. However, a significant increase in linkages with ExxonMobil Group could be positive to the rating.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Weakening ownership and support from ExxonMobil group and/or weakening of access to bank loans and debt capital markets adversely affecting the company's liquidity and financial flexibility
- Sustained high financial leverage in excess of 6.5x as measured by FFO adjusted net leverage including debt from related parties