The RWE on Esso reflects the uncertainty over the impact that the potential change of control will have on its credit profile. We rate Esso using a bottom-up approach, with a three-notch uplift from its standalone credit profile (SCP), reflecting ExxonMobil's 'Medium' incentive to support under Fitch's Parent and Subsidiary Linkage Rating Criteria. Our assessment of BCP's credit profile and its incentive to support Esso after the acquisition will be key factors affecting Esso's credit profile following the completion of the transaction.
Negative rating action to the current ratings could result from Fitch's assessment of BCP's credit profile being only modestly stronger than Esso's SCP, or from BCP having a 'Medium' incentive to support Esso after the acquisition. On the contrary, our assessment of BCP's credit profile being materially stronger than Esso's and a 'High' incentive to support could result in an upgrade of the current ratings.
The Rating Watch may take more than six months to resolve, depending on the closing of the transaction, which is subject to shareholder and regulatory approval.
KEY RATING DRIVERS
Potential Acquisition by BCP: The transaction has an indicative purchase price of around THB31 billion for 100% of Esso's equity interest, based on 3Q22 financials, and includes all of Esso's business except for the finished lubricant and chemical marketing businesses. The funding sources are bank loans and BCP's cash on hand. Related-party debt to Esso will be refinanced using bank loans and the debt capital markets. BCP expects the transaction to be completed by 2H23. A tender offer for minority shareholders (34%) will follow, at the same final agreed price between ExxonMobil and BCP.
BCP will have control over Esso's management after the acquisition, and Esso's staff members will be transferred to BCP. BCP has indicated that the branding of Esso's service stations will be transitioned to its brand over the next two years. Fitch will assess the legal, strategic and operational incentives of BCP to support Esso after the acquisition. A 'High' overall incentive to support could result in Esso being rated on a top-down basis from BCP's consolidated credit profile, while a 'Medium' incentive would result in a bottom-up assessment, with Esso's SCP being notched up for parental support.
Strong Refining Margins Boost Earnings: Fitch expects Esso's EBITDA to improve in 2022 and reach THB17 billion (2021: THB7.9 billion), supported by a stronger refining margin due to the global recovery from supply-demand pressure as well as stock gain. Its refining margin, including stock gains, rose to USD13.3 per barrel in 9M22, from USD7.5 per barrel in 2021, resulting in EBITDA of THB15.6 billion in 9M22. We expect EBITDA to normalise to between THB4.0 billion and THB5.0 billion annually beyond 2022, based on mid-cycle refining margins of around USD4 per barrel, excluding stock gains.
Moderate Financial Profile: We expect the strong EBITDA to result in Esso's EBITDA net leverage improving to 2.1x in 2022 (2021: 3.4x). Normalised EBITDA and modest capex after 2022 drives our EBITDA net leverage forecast of around 2x-4x over the medium term.
Modest Capex: We forecast Esso's annual capex to be around THB1.4 billion between 2022 and 2024. However, the capex can potentially change after the BCP acquisition.
Established Operations: Esso has favourable access to raw materials and products via the ExxonMobil group currently, giving it flexibility to vary crude feedstock and products according to market conditions. Esso's crude run improved in 2022 with a rebound of local fuel consumption to 131 thousand barrels per day, close to its pre-Covid level, reflecting its robust refining operations. Esso has an established presence in Thailand's fuel retailing business, with 780 service stations at end-September 2022. The company added 35 new service stations in 2021 and 51 during 9M22.
Highly Cyclical Business: Esso's SCP 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
The RWE reflects the uncertainty over the potential change in shareholders on Esso's credit profile. Its business profile is moderate relative to that of Thai downstream oil and gas peers. It has a smaller refinery operation and less integration in petrochemicals than IRPC Public Company Limited (A-(tha)/Stable/F2(tha), SCP: bbb(tha)), but benefits from integration into the oil retailing business. Esso's financial leverage is similar to that of IRPC over the medium term. Fitch believes Esso has a 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)/Stable/F1+(tha), SCP: a+(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)). Its financial leverage is higher than that of both peers on a sustained basis.
KEY ASSUMPTIONS
- Brent crude oil prices of USD100 per barrel in 2022, USD85 in 2023, USD65 in 2024 and USD53 thereafter, with Esso's crude procurement costs adjusted for applicable premiums.
- Crude run of 75%-80% in 2022-2024
- Gross refinery margin to be normalised in 2023-2025
- Paraxylene business remains suspended since 2Q21
- Capex of THB1.4 billion a year in 2022-2024
- Dividend payout of 40% from 2023
RATING SENSITIVITIES
Fitch expects to resolve the RWE on completion of the transaction (expected to take longer than six months) based on our assessment of the consolidated credit profile of BCP - Esso's ultimate parent post acquisition - and the parent's incentives to support Esso. Fitch will also resolve the RWE if the acquisition does not proceed.
LIQUIDITY AND DEBT STRUCTURE
Sound Liquidity: Esso had outstanding debt of THB36.4 billion at end-September 2022, of which THB31.4 billion matures within 12 months. The maturing debt mainly comprises of short-term loans from banks and related parties. Liquidity is also 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 THB20 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 a refining capacity of 174,000 barrels per day and over 750 service stations across Thailand.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings