GS Caltex Upgraded To #BBB+# On Good Operating Cash Flow And Disciplined Outlook Stable

Stocks and Financial Services Press Releases Wednesday March 14, 2018 17:51
HONG KONG--14 Mar--S&P Global Ratings

HONG KONG (S&P Global Ratings) March 14, 2018--S&P Global Ratings today said it has raised its long-term corporate credit and debt ratings on Korea-based refining and petrochemical producer GS Caltex Corp. to 'BBB+' from 'BBB'. At the same time, we affirmed our 'A-2' short-term rating on the company. The outlook on the long-term corporate credit rating is stable.

We upgraded GS Caltex to reflect our view that the company will generate good operating cash flow over the next 12-24 months while maintaining a prudent financial policy. Considering the company's deleveraging over the past few years, we expect GS Caltex to maintain its adjusted debt-to-EBITDA ratio of 1.2x-1.4x over the next two years.

In February 2018, GS Caltex announced a petrochemical investment of around Korean won (KRW) 2 trillion to build a mixed-feed cracker with 700,000 tons per year of ethylene capacity, with commercial production expected in 2022. We believe the company's management has been prudent in its investment decision making, as we expect capital investment (capex) to be manageable without having to stretch the company's debt levels over the next 12-24 months. Despite our expectation that oil refining margin trends will normalize toward mid-cycle levels over the next two years, we believe the investment can be funded internally, and expect free operating cash flow to remain positive. Historically, the company has had the flexibility to manage investments and dividends during volatile markets, as witnessed in 2008 and 2014 when the company announced zero dividends, and substantially reduced investments.

We believe GS Caltex's lower level of debt has resulted in more stable and sustainable credit metrics. The company's total debt substantially declined to around KRW4 trillion as of the end of 2017 from KRW6.9 trillion at end 2014, thanks to a favorable operational environment and the company's prudent use of cash.

Despite our expectation of some margin normalization from peak-of-the-cycle levels in 2016-2017, we continue to expect GS Caltex to generate stable operating cash flows to maintain its current credit metrics--with a debt-to-EBITDA ratio of below 1.5x--even after taking on the new petrochemical investment. Reflecting this, we revised the financial risk profile on GS Caltex to modest from intermediate.

The stable outlook reflects our view that GS Caltex is likely to maintain debt to EBITDA below 1.5x over the next 12-24 months. We base our expectation on the company's prudent financial policy as evidenced by disciplined capacity expansion and normalization of oil refining industry trends to mid-cycle level margins over the next 24 months. This also incorporates our view that GS Caltex will continue to be a moderately strategic entity of Chevron Corp.

We may lower the ratings if debt to EBITDA exceeds 1.5x on a sustained basis. This may result from a significant deterioration in operating cash flow due to weaker refining, petrochemical, and lubricant margins than we expect. The company becoming more aggressive in future capital investments and a significant increase in dividends could also result in us lowering the ratings.

We see limited upside potential over the next 12-24 months, mainly due to the inherent volatility of the oil refining and petrochemical industries. Though limited in potential, we may raise the rating if the company substantially increases its scale and further diversifies its business portfolio, resulting in the reduction of operational volatility, while maintaining low debt levels.

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