Bangkok--22 May--Fitch Ratings
Fitch Ratings (Thailand) has downgraded the National Short-Term Rating on Esso (Thailand) Public Company Limited's (Esso) bills of exchange revolving programme of up to THB12 billion to 'F2(tha)' from 'F1(tha)'. The maturity of each series of bills is no more than 270 days under the programme.
The downgrade reflects Fitch's expectation that Esso's financial leverage will remain high, even in the post-coronavirus period. Fitch expects Esso's funds from operations (FFO) net leverage to remain above 5.5x in 2022-2023. Esso's profitability and operating cash flow have been hit harder than its domestic peers in the downcycle, given its smaller refinery and lesser petrochemical integration. This is likely to continue in 2020 amid weak demand and margin due to the disruptions caused by the coronavirus.
KEY RATING DRIVERS
Weak Earnings: Fitch expects Esso's EBITDA to decline further in 2020 (2019: negative THB2.0 billion), although the weak EBITDA in 2019 was partly owing to a lower production from the major turnaround of its refinery. The lower EBITDA in 2020 will be due mainly to a weak refining margin, stock loss from a sharp oil price drop in 1Q20 and lower-than-normal crude run as a result of soft demand. Operating cash flow is likely to improve somewhat in 2021, but remain weak. Fitch expects Esso to generate a mid-cycle EBITDA of THB3.0 billion to THB4.0 billion a year in 2022-2023, resulting in FFO net leverage hovering at 6.0x-7.0x.
Some Capex Revision: Esso is likely to continue to expand its retail network and introduce new imaging to its existing gas stations in 2020. However, the capex plan for 2021 is flexible and the company has not planned for any large investment projects over the medium term. Fitch expects Esso's capex to stay at about THB1.8 billion-THB1.9 billion in 2020 (2019: THB1.7 billion).
Sound Liquidity: Fitch believes Esso has a strong capability to manage its liquidity, although the company is likely to continue to generate negative EBITDA in 2020 and has high financial leverage.
We view the parent group's financing arrangements - senior unsecured obligation and based on market prices - as having helped Esso to manage its liquidity and supported its external debt financing. The inter-group loans were THB17.2 billion at end-2019, accounting for about 64% of total debt. In addition, Esso has THB54 billion in standby credit facilities from the parent group to back-up its liquidity profile.
Strong Parental Support: Fitch believes Esso has strong support from its ultimate parent, Exxon Mobil Corporation, and its affiliate. This was evident from the financial support received from the parent group during a period of high financial leverage in 2014. The proportion of inter-group financing arrangements since then has remained high at 60%-70%. This has helped Esso reduce exposure to external debt. Esso is also able to exploit its parent's worldwide procurement network for crude oil and refined products and use ExxonMobil's technology and engineering services, human resources and R&D to improve operational efficiency. Esso's refinery is ExxonMobil's second-largest refinery in Asia.
Integrated Complex Refiners: The rating also reflects Esso's complex refinery, established brand name and favourable access to raw materials via ExxonMobil group, which provides flexibility to vary crude feedstock and products according to market conditions. The integration of paraxylene (PX) production widens Esso's output range, optimises its product lines and somewhat reduces the volatility of its refining margin, although the current excess regional PX capacity has weakened margins. Esso has a strong, well-established brand name in Thailand's fuel retailing business, with 638 service stations at end-2019. It plans to increase its service stations and maintain its competitive market position in Thailand's oil retailing business. The company added 73 new services stations in 2018 and 41 in 2019.
Highly Cyclical Business: Esso's credit profile is constrained by the inherent cyclicality of its businesses and single production-site risk. The volatility of refining margins, oil prices and working-capital requirements could significantly affect earnings and cash-flow generation.
Esso has a smaller refinery operation and less integration with petrochemicals than IRPC Public Company Limited (A-(tha)/Stable/F2(tha), Standalone Credit Profile (SCP): bbb(tha)), but has integrated into the oil retailing business. In addition, Esso's financial leverage is higher than that of IRPC. Fitch believes Esso has stronger linkage with its parent than IRPC.
Esso has a smaller operating scale and less integration with petrochemicals than PTT Global Chemical Public Company Limited (AA+(tha)/Negative/F1+(tha), SCP: aa-(tha)). Esso's refinery is also less complex and smaller than that of Thai Oil Public Company Limited (AA-(tha)/Negative/F1+(tha), SCP: a(tha)). Meanwhile, Esso's financial leverage is higher than that of both peers on a sustained basis.
Fitch's key assumptions within our rating case for the issuer include:
Crude oil prices (Brent) of USD35 per barrel (bbl) in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and USD55/bbl thereafter, with Esso's crude procurement costs adjusted for applicable premiums.Crude run of 70% in 2020 due to weak demand, and to improve gradually in 2021-2022.Weakened gross refining margin in 2020 due mainly to stock loss from a sharp oil price drop in 1Q20, and to recover in 2021 and 2022.Softened PX profitability in 2020 then gradual recovery in 2021 and 2022.Capex of THB1.8 billion-1.9 billion in 2020 and decline in 2021.30% dividend payout.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Successful deleveraging with FFO net leverage below 5.5x on a sustained basisA significant strengthening of its links with ExxonMobil group
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weakening linkages with ExxonMobil groupWeaker access to bank loans and the debt capital market
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Esso had outstanding debt of THB26.9 billion at end-2019. Most of the THB22.8 billion of debt due to mature within 12 months is short-term debt used to finance working capital. Liquidity is supported by available standby credit facilities of THB54 billion from ExxonMobil group. Esso also has strong access to bank funding, with uncommitted facilities of about THB30 billion.
About 64% of total outstanding debt at end-2019 was inter-company loans, including short-term (about 77%) and long-term (about 23%) loans. Esso plans to maintain its proportion of inter-company loans at 60%-70%, which is consistent with the holding of its parent group.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com