KEY RATING DRIVERS
Strong Support from Parent: The rating reflects the continued strong financial support from the company's ultimate parent, Exxon Mobil Corporation (ExxonMobil). In Fitch's view, the increasing inter-company loans ensure that ESSO's liquidity requirements are well met during this period of high financial leverage and weak operating performance. We expect such inter-group financing arrangements to continue in the foreseeable future.
Leverage High, but Improving: Improving operating cash flows and lower working capital needs with the fall in global crude oil prices have reduced the company's debt requirements to an extent. Fitch expects ESSO's debt to continue to reduce gradually in 2016-2017, as we do not expect major capex. However, ESSO's FFO-adjusted net leverage is likely to remain relatively high in 2016-2017.
Cash Flow Forecast Revised Up: ESSO's operating cash flows in 2015 are likely to be significantly higher than our previous expectations with stronger refining margins achieved in 2015. Fitch expects margins to soften in 2016. Nevertheless, Fitch has revised ESSO's projected operating cash flows for 2016-2019 up slightly. This is mainly to reflect low oil prices and benefits to Esso from a weaker Thai baht. Low oil prices have led to stronger demand for refined products, lower energy costs and lower inventory holding costs. Fitch expects oil prices to remain low in 2016, before increasing in 2017-2018.
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 paraxylene (PX) production provides a wider product range and optimisation of product lines, although excess regional PX capacity has led to weak margins on this product. ESSO also has a strong market position in oil retailing as Thailand's third-largest retailer in 6M15.
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 our rating case for the issuer include:
- crude oil prices (Brent) of USD55 per barrel in 2016, USD65 per barrel in 2017, USD70 per barrel in 2018, and USD75 thereafter, with ESSO's crude procurement costs adjusted for applicable premiums;
- high gross refining margin in 2015, and softer margin in 2016;
- weak PX product-to-feed margin in 2015, and some recovery in 2016;
- no major capex in 2015-2019.
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, because the company's leverage is likely to remain high. 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 of ownership by and support from ExxonMobil group and/or weakening of access to bank loans and debt capital markets that adversely affect the company's liquidity and financial flexibility
- Sustained high financial leverage in excess of 6.5x (end-2014: negative FFO) as measured by FFO-adjusted net leverage, including debt from related parties