Fitch Affirms Esso (Thailand)#s Bills of Exchange at #F1(tha)#

Stocks and Financial Services Press Releases Tuesday November 26, 2019 15:53
Bangkok--26 Nov--Fitch Ratings

Fitch Ratings (Thailand) has affirmed the National Short-Term Rating on ESSO (Thailand) Public Company Limited's bills of exchange revolving programme of up to THB12 billion at 'F1(tha)'. The maturity of each series of bills is no more than 270 days under the programme.

KEY RATING DRIVERS

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. Since then, the proportion of inter-group financing arrangements has remained high at 60%-70% (end-September 2019: 67%), although total debt and financial leverage have fallen substantially. 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.

Rising Leverage: We expect lower operating cash flow due to weak refining and paraxylene (PX) margins as well as a dip in production from a planned shutdown for major maintenance to substantially increase Esso's 2019 financial leverage, as measured by FFO adjusted net leverage. Esso's FFO adjusted net leverage increased to 4.2x in 2018 (2017: 1.1x) on lower operating cash flow and higher dividend payment. Fitch expects the ratio to reduce to 3.5x-4.3x in 2020-2022 as operating cash flow improves and for higher capex to be partly offset by lower dividend payout.

Higher but Manageable Capex: Fitch expects Esso's capex to increase to about THB1.8 billion a year in 2019-2021 (2018: THB1.3 billion), as the company continues to expand its retail network and introduce new imaging to its existing gas stations. Esso will also continue to optimise its integrated value chain, further increasing crude diversification to enhance margins, and to roll out new premium products. Nevertheless, these projects should not require large investment.

Some Benefit from New Regulations: Fitch expects refining margins to remain under pressure in 2019 following capacity additions and uncertain demand due to the China-US trade war. However, International Maritime Organisation regulations to slash marine sector emissions from 2020 should encourage demand for low-sulphur diesel, which is likely to boost overall distillate margins and benefit refineries with more complex facilities. Esso produces middle distillate at around 45% of output.

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 PX production widens Esso's output range, optimises its product lines and somewhat reduces the volatility of its refining margin, which has been weakened by current excess regional PX capacity.

Esso has a strong, well-established brand name in Thailand's fuel retailing business, with 625 service stations at end-October 2019. It plans to increase its service stations and maintain its third to fourth market position in Thailand's oil retailing business. The company added 73 new services stations in 2018 and 22 in 9M19.

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.

DERIVATION SUMMARY

Esso has a smaller refinery operation and less integration with petrochemicals than IRPC Public Company Limited (A(tha)/Stable/F1(tha), Standalone Credit Profile (SCP): bbb+(tha)), but has integrated into the oil retailing business. However, Esso's financial leverage is slightly lower than that of IRPC. In addition, 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)/Stable/F1+(tha), SCP: aa-(tha)). Esso's refinery is also less complex and smaller than that of Thai Oil Public Company Limited (AA(tha)/Stable/F1+(tha), SCP: a+(tha)). Meanwhile, Esso's financial leverage is higher than that of both peers on a sustained basis.

KEY ASSUMPTIONS
  • Crude oil prices (Brent) of USD65.0/barrel in 2019, USD62.5/barrel in 2020, USD60.0/barrel in 2021 and USD57.5/barrel thereafter, with Esso's crude procurement costs adjusted for applicable premiums.
  • Weakened gross refining margin in 2019 to recover in 2020.
  • Major turnaround in 2019.
  • Softened PX product-to-feed margin in 2019 then slightly recovering in 2020.
  • Higher capex in 2019-2021 from 2018.
  • 40% dividend payout.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • A significant strengthening of links with ExxonMobil group
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • Weakening linkage with ExxonMobil group
  • Weaker access to bank loans and the debt capital market
  • High financial leverage exceeding 5.5x for a sustained period, as measured by FFO adjusted net leverage. We revised the leverage guideline to 5.5x, from 6.5x, to reflect the company's weaker business profile relative to that of Fitch-rated Thai refinery and petrochemical peers.
LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: Esso had outstanding debt of THB18.7 billion at end-September 2019. Most of the THB16.8 billion of debt due to mature within 12 months was short-term debt used to finance working capital. Liquidity is supported by cash and cash equivalents of THB0.6 billion and available undrawn revolving loan facilities of THB57.4 billion from ExxonMobil group. Esso also has strong access to bank funding, with uncommitted facilities of THB33.3 billion.

About 67% of total outstanding debt at end-September 2019 was inter-company loans, including short-term (about 96%) and long-term (about 4%) loans. Esso plans to maintain its proportion of inter-company loans at 60%-70%, which is consistent with the holding of its parent group.

Additional information is available on www.fitchratings.com

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