Bangkok--18 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)'. The maturity of each series of bills is no more than 270 days under the programme.
KEY RATING DRIVERS
Continued Strong Parent Support: The rating reflects the continued strong financial support ESSO receives from its ultimate parent, Exxon Mobil Corporation. Fitch views the increase of inter-company loans during high financial leverage and weak operating performance in 2014 has supported ESSO's liquidity and lowered its exposure to external debt obligations. The proportion of inter-group financing arrangements has remained high at 60%-65%, although the company's overall debt and inter-company loans have decreased in 1H16 from 2015.
Stronger Credit Metrics: Esso's credit metrics have improved substantially since 2015 thanks to its reduced debt and increased profitability. Low oil prices have increased demand for refined oil products and lowered energy costs and working-capital requirement. Fitch expects ESSO's debt to continue falling in 2017-2018 due to a lack of major capex and its FFO-adjusted net leverage to stay below 5x (1H16: 3.5x), although operating cash flows are likely to soften and oil prices recover from 2017.
No Major Capex: ESSO does not plan a major expansion or investment in the next two to three years. The company aims to improve its production efficiency and increase its use of challenged-crudes to control costs and improve margins, as well as enhance its retail network. These are small projects with low capex requirements. ESSO's capex has fallen to THB0.8bn-1.2bn a year since the completion of its Sriracha Clean Fuels Project in 2011.
Integrated Refiner: The rating also reflects ESSO's cost competitiveness arising from its complex refinery capacity that allows the company to adjust output to suit demand, favourable access to raw materials and established brand name. The integration of paraxylene (PX) production widens ESSO's output range and optimises its product lines, although excess regional PX capacity has weakened margins. ESSO also has a strong position in fuel-retailing as Thailand's third-largest fuel-retailer by volume in 2015.
Highly Cyclical Business: ESSO's credit profile is tempered by its high vulnerability to oil prices, refining margins and petrochemical product-to-feed margins, 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.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for ESSO include:
- crude oil prices (Brent) of USD42/barrel (bbl) in 2016, USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl thereafter, with ESSO's crude procurement costs adjusted for applicable premiums
- high gross refining margin in 2016, softening in 2017
- PX product-to-feed margin to gradually increase in 2016-2017
- capex of THB1bn-1.2bn a year in 2016-2017, reducing to THB0.7bn a year in 2018-2020
RATING SENSITIVITIES
Positive: developments that may, individually or collectively, lead to positive rating action include a significant strengthening of links with ExxonMobil group.
Negative: developments that may, individually or collectively, lead to negative rating action include:
- weakening ownership by and support from ExxonMobil group
- weaker access to bank loans and debt capital market
- sustained high financial leverage, as measured by FFO-adjusted net leverage, exceeding 6.5x (2015: 6.1x)