Viva Energy Holding Pty Ltd. Rating Affirmed At #BBB-# On Announcement Of Outlook Remains Stable

Stocks and Financial Services Press Releases Thursday June 21, 2018 11:08
SYDNEY--21 Jun--S&P Global Ratings

SYDNEY (S&P Global Ratings) June 21, 2018--S&P Global Ratings said today that it has affirmed its 'BBB-' issuer credit rating on Viva Energy Holding Pty Ltd., an Australian oil refining and marketing company. The outlook remains stable.

We affirmed the ratings to reflect our view that Viva Energy's current strategy and operating model will largely remain intact after the company's proposed IPO. The Australian oil refining and marketing operator will launch an IPO on the Australian Stock Exchange, and will use the proceeds to fund a capital return.

The current shareholder, Vitol Investment Partnership, will maintain a significant interest of 40% to 50% post the IPO, providing likely continuity of Viva Energy's existing strategy. In addition, we consider Viva Energy's key commercial arrangements with long-dated maturities ensure long-term certainty over the continuation of the company's operating model.

We consider Viva Energy's financial profile can accommodate the company's proposed dividend policy of 50%-70% of underlying net profit after tax. We forecast Viva Energy will have sufficient headroom to maintain debt to EBITDA below 2x and funds from operations (FFO) to debt above 35%. For the 'BBB-' rating, we expect Viva Energy to maintain adjusted debt to EBITDA in the 1.5x to 2.5x range, and an adjusted FFO-to-debt ratio of greater than 35%.

Nevertheless, we expect the payout to reduce Viva Energy's rating buffer and financial flexibility. We also acknowledge that Viva Energy's financial policy objectives may be challenged if market conditions were to deteriorate and the company were to maintain a high dividend payout under its new dividend policy.

Underpinning Viva Energy's operating model are its key commercial arrangements that have long-dated maturities. These arrangements include the alliance agreement with Coles supermarkets (maturing in 2024 with a five-year option either party can trigger to 2029), fuel supply agreement with Vitol (due 2028, plus five-year options), fuel supply agreement with Vitol Aviation (no defined maturity), and a retail fuel branding agreement with Shell (maturing in 2024, with two automatic five-year extensions).

The 'BBB-' rating reflects Viva Energy's solid market position in Australian fuel retailing and commercial fuels. The group holds about 25% market share across the total fuel market by volume and has an integrated fuel-supply business throughout the supply chain. Viva Energy has exclusive rights to use the Shell brand in Australia under a long-term agreement for its retail fuels business.

The group benefits from relatively high barriers to entry as a result of well-located supply and distribution infrastructure, including import terminals and a pipeline linking the Geelong refinery to Melbourne. In addition, it has a national retail network that would be difficult and capital intensive to replicate.

The group generates stable rental income and fuel margin from its retail alliance with Coles. The latter operates the convenience stores and forecourt, while Viva Energy supplies the fuel, maintains the fuel equipment, and controls the sites.

Moderating these strengths is the group's exposure to a small single-site refinery in Geelong, Victoria, which we expect to generate 30% to 50% of earnings. The refining business is cyclical, capital-intensive, carries high operating risks, and has large working capital requirements. Viva Energy is also exposed to volatility in oil prices, refining margins, exchange rates, and macroeconomic cycles that can affect consumer demand for fuel in its retail business.

We forecast modest deleveraging on an adjusted debt-to-EBITDA basis over the next two years. We expect leverage to remain relatively flat over the year ending Dec. 31, 2018, despite lower anticipated refiner margins. Our base case forecasts the company's debt to EBITDA will remain at about 2x on an adjusted basis and FFO to debt will remain between 35% and 40% over the next two years.

The stable rating outlook reflects Viva Energy's financial flexibility to maintain leverage within an adjusted debt to EBITDA of 1.5x-2.5x, supported by its sound cash flow generation. The stable outlook also reflects the good visibility of Viva Energy's earnings from rental income through its alliance with Coles supermarkets and our expectation that the overall profitability will be steady within the alliance.

We could lower the ratings if Viva Energy's debt to EBITDA increases to more than 2.5x or FFO to debt reduces to less than 35% on a sustained basis. This scenario could occur if:
  • Refining margins were to substantially decline, or an oil price spike were to occur. The latter scenario could materially reduce demand for fuel and increase the cost of inventory and drawings under the borrowing base facility.
  • An unforeseen operational shutdown were to occur at the refinery that materially affected earnings.
  • The company were to adopt a more aggressive operating strategy or financial policy such that we considered the group's financial flexibility has significantly reduced.
We consider ratings upside to be unlikely given inherent volatility in the refining business and the group's current financial policy objectives.

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