Bangkok--13 Mar--Fitch Ratings
Fitch Ratings (Thailand) has affirmed refining and petrochemical company IRPC Public Company Limited's (IRPC) National Long-Term Rating at 'A-(tha)', its National Short-Term Rating at 'F2(tha)', and the senior unsecured national rating at 'A-(tha)'. The Outlook is Stable.
The ratings reflect IRPC's improving operating cash flows and moderate financial leverage after it invests in a paraxylene (PX) project.
KEY RATING DRIVERS
More Headroom for Investments: Fitch expects IRPC's leverage to stay at a relatively low level in 2018, supported by robust cash flow from operations. IRPC's financial leverage, measured by FFO adjusted net leverage, improved to 2.8x in 2017 (2016: 3.6x) and we expect it to stay at 2.9x-3.5x in 2018-2019, which will give the company more headroom to support additional investments and manage any decline in product margins.
Higher Capex Likely: The company's capex is likely to increase meaningfully from a previous plan as we believe the company is likely to commit to the PX project following an investment review. The PX project will convert excess naphtha, toluene and xylene to PX, benzene and other products at a company-estimated cost of about USD1 billion-1.1 billion. Fitch expects the bulk of the capex to be made over 2019-2022. Therefore, Fitch expects its FFO adjusted net leverage to increase to about 3.5x-4.0x in 2020-2022 (2017: 2.8x).
Improving Business Profile: Fitch expects IRPC's margin improvement to be sustained with lower volatility on the increased contribution of higher-value-added products and a higher crude run due to facility expansion. The start of two major projects, the upstream project for hygiene and value-added products to increase the production yield of high value refining and chemical products, i.e. gasoline, propylene and polypropylene, and a polypropylene expansion and polypropylene inline compound project in 2016-2017, along with the increased refinery capacity, will drive earnings and margin growth. Fitch expects the PX project to add to margin improvement upon its completion, scheduled for 2023.
IRPC has a competitive advantage as a fully integrated refining and petrochemicals producer with expertise and a long track record in Thailand's petrochemical business. Vertical integration provides cost advantages, a broad product range and reduced earnings volatility relative to non-integrated operators.
Highly Cyclical Business: IRPC's credit profile is tempered by its vulnerability to oil prices, volatile refining margins and petrochemical spreads, as well as high working-capital volatility, which can significantly affect its earnings and cash flow generation.
Credit Terms Support Flexibility: Fitch believes the extended credit terms on crude purchases from PTT Public Company Limited (AAA(tha)/Stable) - its single-largest shareholder - provide financial flexibility to IRPC, in addition to liquidity support. Credit terms of 60 days from PTT have been extended for another year until end-2018 before returning to normal 30-day terms. The terms will be reviewed annually and can be extended by a mutual agreement, according to the company. This will provide flexibility for the company to manage its financial leverage and liquidity.
Linkages with PTT: IRPC's long-term ratings incorporate a one-notch uplift to take into account its moderate linkages with its major shareholder, PTT, as assessed under Fitch's Parent and Subsidiary Rating Linkage criteria. IRPC falls within PTT's central treasury management framework, while key management personnel from PTT are rotated among its group of companies (including IRPC), according to PTT. Furthermore, PTT has extended commercial support to IRPC, such as the extended credit periods for feedstock supplies. Although PTT has increased its stake in IRPC to 48.1% from 38.5%, this should not have a material impact on IRPC's linkages to PTT.
DERIVATION SUMMARY
IRPC's ratings reflect the integration of its refinery to petrochemicals production. Its business profile is moderate relative to Thai downstream oil and gas peers, while its leverage is relatively high. IRPC has a smaller operating scale than PTT Global Chemical Public Company Limited (AA(tha)/Stable/F1+(tha), standalone credit profile of AA-(tha)) and Thai Oil Public Company Limited (AA-(tha)/Stable/F1+(tha), standalone credit profile of A+(tha)) but has a higher leverage than these two companies. IRPC's operating scale is larger than Esso (Thailand) Public Company Limited (bills of exchange revolving programme rated F1(tha)) with better margins and slightly lower leverage. However, we think ESSO has stronger linkages with its parent.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Benchmark Brent crude at USD52.50 per barrel in 2018, USD55 per barrel in 2019, USD57.50 per barrel in 2020 and thereafter - with IRPC's crude procurement costs adjusted for applicable premiums
- Gross integrated margins slightly softer from 2018
- PX project investment of USD1 billion-1.1 billion over 2019-2022
- 60-day credit-term extension from PTT will continue in 2018, and drop to a normal 30 days in 2019
- 50% dividend payout ratio
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- FFO adjusted net leverage sustained below 3x
- Disciplined approach to capex and shareholder distributions, demonstrating a commitment to improving its balance sheet quality
- Evidence of stronger ties with PTT
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Weaker-than-expected operating cash flows, increasing debt-funded investments or high cash distributions to shareholders resulting in FFO adjusted net leverage rising above 4.5x on a sustained basis
- A weakening of linkage with PTT
LIQUIDITY
Sufficient Liquidity: IRPC had outstanding debt at end-2017 of THB58.8 billion with THB13.6 billion due to mature within 12 months, consisting of THB5.0 billion in bonds, THB5.6 billion of the current portion of long-term debt and THB3.0 billion of short-term borrowings from financial institutions. The liquidity is supported by unrestricted cash of THB2.1 billion, available committed working capital facilities of THB5 billion at end-2017, a credit facility from PTT of THB10 billion and the extension of the flexible credit terms from PTT.