Esso's rating reflects our expectation of a recovery in operating cash flow in 2021-2023 from a gradual rebound in oil demand and margin, despite disruptions from the Covid-19 pandemic and high leverage over the next two years. Its liquidity will continue to be strong with financial support from the ExxonMobil group.
KEY RATING DRIVERS
Earnings Recovery: Fitch estimates Esso's 2021 EBITDA increased substantially, driven by high stock gains as a result of a significant rise in global crude oil prices. Its refining margin, including stock gains, rebounded to USD7.6 per barrel in 9M21 from -USD3.6 per barrel in 2020, resulting in EBITDA of THB6.3 billion in 9M21.
Fitch expects local oil consumption to improve in 2022 from a decline in 2021, although the uncertainty over the pandemic with potential additional travel restrictions would disrupt the recovery. We expect Esso's EBITDA, based on mid-cycle refining margins of around USD4 per barrel excluding stock gains, to range between THB3.0 billion and THB4.0 billion a year beyond 2021.
High Leverage: Fitch expects Esso's funds flow from operations (FFO) net leverage to remain high at around 6.5x-7.5x over the next two years. Esso's leverage probably dropped temporarily to around 4x in 2021, benefitting from strong EBITDA due to inventory gains.
Moderate Capex: Esso is likely to continue its retail network expansion in the next two-to-three years with some general maintenance capex. The company also plans to spend on improvements to its refinery to meet the Euro 5 standards, although the amount will be relatively small. Fitch expects Esso to have capex of about THB1.3 billion a year in 2021-2023 (9M21: THB0.9 billion) although there may be some flexibility.
Linkage with Parent: Fitch believes Esso's ultimate parent, Exxon Mobil Corporation, and its affiliate have moderate incentives to support the Thai company under our Parent and Subsidiary Linkage Rating Criteria. Esso's refinery is the group's second-largest in Asia, offering its products under the group's trademark, although earnings contribution to the group is small.
The ExxonMobil group also has a good record in providing strong financial support to Esso. Inter-group financing arrangements have remained high at 60%-70% of total debt since 2014. In addition, the group has provided THB54 billion in standby credit facilities. These have helped Esso reduce exposure to external debt and maintain its healthy liquidity profile.
Robust Refinery Operations, High Reliability: The company has favourable access to raw materials and products via the ExxonMobil group, providing flexibility to vary crude feedstock and products according to market conditions. We believe it has lower product diversification, as its paraxylene (PX) production has been suspended since April 2021 because of poor margins from excess supply, but this is offset by higher gasoline yields that result in good profitability.
Well-Established Oil Retailing Business: Esso has a strong brand name in Thailand's fuel retailing business, with 721 service stations at end-September 2021. It plans to increase its service stations and maintain its third to fourth market position in Thailand's oil retailing business. The company added 69 new service stations in 2020 and 25 during 9M21.
Highly Cyclical Business: Esso's credit profile is constrained by the inherent cyclicality of its businesses, small operating scale 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's business profile is moderate relative to that of Thai downstream oil and gas peers. Esso has a smaller refinery operation and less integration in petrochemicals than IRPC Public Company Limited (A-(tha)/Stable/F2(tha), Standalone Credit Profile (SCP): bbb(tha)), but benefits from integration into the oil retailing business. In addition, Esso's financial leverage is higher than that of IRPC. Fitch believes Esso has stronger linkage with the ExxonMobil group than IRPC has with its parent.
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 (A+(tha)/Negative/F1(tha), SCP: a-(tha)). Meanwhile, Esso's financial leverage is higher than that of both peers on a sustained basis.
KEY ASSUMPTIONS
Fitch's Key Assumptions within our rating case for the issuer include:
- Crude oil prices (Brent) of USD71 per barrel in 2021, USD70 per barrel in 2022, USD60 per barrel in 2023 and USD53 per barrel thereafter, with Esso's crude procurement costs adjusted for applicable premiums;
- Crude run of 70%-75% in 2021-2023 from gradual local demand recovery;
- Gross refinery margin (excluding inventory gains) to improve modestly from 2021;
- PX business remains suspended from 2Q21;
- Capex of THB1.3 billion a year in 2021-2023;
- Dividend payout of 30% from 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Successful deleveraging with FFO net leverage below 5.5x on a sustained basis;
- A significant strengthening of its links with the ExxonMobil group.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Weakening linkages with the ExxonMobil group;
- Weaker access to bank loans and the debt capital market;
- Weak operations, resulting in sustained EBITDA losses.
LIQUIDITY AND DEBT STRUCTURE
Sound Liquidity: Esso had outstanding debt of THB28.7 billion at end-September 2021, of which THB17.4 billion matures within 12 months. Liquidity is supported by the available standby credit facilities of THB54 billion from the ExxonMobil group. Esso also has strong access to bank funding, with uncommitted facilities of about THB30 billion.
ISSUER PROFILE
Esso is an integrated oil refining, petrochemical and marketing company, which has operated in Thailand for more than 125 years. Exxon Mobil Corporation (via ExxonMobil Asia Holdings Private Limited) holds a stake of about 66%. Esso has refining capacity of 174,000 barrels per day and over 700 service stations across Thailand.
Source: Fitch Ratings