Fitch has also assigned its upcoming THB42 billion medium-term debenture programme a National Long-Term Rating of 'A-(tha)'. Debentures under the programme will be senior unsecured and rated at the same level as IRPC's National Long-Term Rating, as they will constitute its direct, unsecured, unconditional and unsubordinated obligations.
The Negative Outlook reflects the risk that IRPC's financial leverage - measured by EBITDA net leverage - will remain above 5.5x in 2023 and beyond. Fitch expects IRPC's EBITDA net leverage to reduce to about 5.5x in 2023 and decrease further in 2024 from 13.2x in 2022, as we expect operating cash flow to improve. However, IRPC's financial leverage could be sustained above 5.5x if demand or margins weaken on a slowdown in the economy in 2023 and beyond, which could constrain the earnings recovery and the company's deleveraging.
IRPC's ratings continue to benefit from a two-notch uplift from its Standalone Credit Profile (SCP), reflecting our assessment of the likelihood of support from its stronger parent, PTT Public Company Limited (AAA(tha)/Stable).
KEY RATING DRIVERS
Risks to Leverage: IRPC's EBITDA net leverage increased substantially to 13.2x in 2022 from 1.9x in 2021 due to weak EBITDA as a result of large hedging losses and rising debt from higher working-capital needs due to higher oil prices. Fitch expects EBITDA net leverage to decrease to about 5.5x in 2023 and 4.4x in 2024, driven by improving operating cash flow, but risks remain amid the uncertainty in the economy.
Operating Cash Flow to Recover: Fitch expects IRPC's EBITDA to increase to THB11 billion-12 billion in 2023 from THB5.1 billion in 2022 in the absence of hedging losses. IRPC recorded hedging losses of THB8.4 billion in 2022 as actual crude and product prices exceeded hedging prices. The company did not have hedging exposure left at end-2022. IRPC will continue hedge in 2023, according to its hedging policy, but the post-hedge crack spreads are likely to be in line with the current market prices, limiting any large losses.
Its crude run will also increase in 2023 after a major refinery turnaround in 2022. Fitch expects market gross refining margins (excluding inventory gains/losses) to soften in 2023, but remain high and above mid-cycle levels.
Weak Chemical Spreads: Fitch expects the volatility in petrochemical spreads to continue in 2023 with spreads remaining weak with only modest improvement from 2022. We expect the slowdown in global economic growth in 2023 to weigh on demand, although the economic recovery in China following the lifting of its "zero-Covid" policy may mitigate risks. New petrochemical capacity, mainly in Asia, will pressure petrochemical spreads, while energy prices are likely to remain high, although lower than in 2022.
Flexible Capex: We think IRPC has flexibility to manage its capex, as committed capex is only for the ultra-clean fuel (UCF) project to upgrade its refinery to meet Euro 5 emission standards. IRPC expects to spend THB6.7 billion on the UCF project in 2023-2024. IRPC's THB8.9 billion capex in 2022 was below the THB12 billion planned at the start of the year. Fitch expects IRPC's investment to increase over the medium term once the balance sheet strengthens to increase exposure to specialty products over the next five years. It may use joint ventures and/or acquisitions.
Credit Terms Support Flexibility: Fitch believes the extended credit terms on IRPC's crude purchases from PTT, its largest shareholder, provide financial flexibility and liquidity support for IRPC to manage leverage. IRPC has gradually reduced the terms to about 60 days on average in 2022 from 90 days in 2020. However, the 90-day credit terms from PTT have been extended for another year until end-2023. IRPC expects to maintain the terms at about 60 days in 2023, but it may extend the terms if needed to support its deleveraging beyond 2023.
Improving Business Profile: We expect IRPC's margin to widen modestly over the medium term as it aims to raise its high-value-added products to 52% of total polymer sales volume by 2025 (2022: 22%). The start of its polypropylene (PP) expansion project, PP inline compound and acrylonitrile butadiene styrene powder projects since 2021 should boost margins, given their wider spreads than commodity-grade products. IRPC expects the UCF project, scheduled for commercial operation in January 2024, to enhance its refining upgrading units and profitability upon completion.
Fully Integrated Refinery: IRPC has a competitive advantage as a fully integrated refining and petrochemical company with expertise and a long record in Thailand. Its recent and planned investments will lead to further integration in petrochemical products. Vertically integrated producers have cost advantages, a broader product range and lower earnings volatility relative to non-integrated operators.
Highly Cyclical Business; Single Site: IRPC's credit profile is exposed to the inherent cyclicality of its businesses and the concentration of its production facilities at one site. The volatility of oil prices, refining margins and petrochemical spreads, as well as high working-capital requirements, could significantly affect earnings and cash flow generation.
Linkages with Parent: IRPC's National Long-Term Rating incorporates the two-notch uplift from its 'bbb(tha)' SCP, reflecting our view that parent PTT has 'Medium' strategic and operational incentives to support IRPC under Fitch's Parent and Subsidiary Linkage Rating Criteria. This is because Fitch believes the petrochemical and refinery business, in which IRPC is a vital component, is strategically important to PTT.
IRPC is PTT's key petrochemical producer, focusing on downstream and naphtha-based production. IRPC's importance was evident in PTT's extension of credit terms for crude supply to alleviate the subsidiary's cash flow pressure. The legal incentives are assessed as 'Weak'.
DERIVATION SUMMARY
IRPC's SCP reflects the integration of its refining and petrochemical operations. Its business profile is moderate relative to that of Thai downstream oil and gas peers, while its leverage is high. IRPC has a larger operating scale than Esso (Thailand) Public Company Limited (bills of exchange: F2(tha)/Rating Watch Evolving (RWE)) in terms of refining capacity, revenue and EBITDA. IRPC has larger petrochemical operations but ESSO has an oil-retailing business. IRPC has better margins and lower leverage. Fitch believes Esso previously had a stronger parental linkage than IRPC. However, the RWE on Esso reflects the uncertainty over the impact that a potential change of control will have on its credit profile, following the announcement that Bangchak Corporation plans to acquire all the shares of Esso.
IRPC has larger operating scale, and greater upstream integration and product diversification than HMC Polymers Company Limited (A-(tha)/Stable, SCP: bbb+(tha)). However, HMC is more advanced in product and technology, and generates higher margins than IRPC, even excluding the refinery business, as HMC focuses on differentiated and specialty products. HMC has more diversified feedstock, which is based on gas and naphtha. We believe both companies' business profiles are comparable, but HMC has stronger credit metrics. HMC's SCP is therefore one notch higher than that of IRPC.
IRPC's refinery is less complex and smaller than that of Thai Oil Public Company Limited (TOP, A+(tha)/Negative, SCP: a-(tha)), but IRPC has larger petrochemical operations. TOP has a stronger balance sheet over the long term and a better operating profit margin due to a higher utilisation rate at its plant. IRPC's rating is therefore lower than that of TOP, even though they have a similar support assessment.
IRPC has a much smaller operating scale and petrochemical operations than PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, SCP: a+(tha)). It is also weaker than PTTGC in terms of leverage and operating profit margin.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within our Rating Case for the Issuer Include:
- Benchmark Brent crude price at USD85/barrel in 2023, USD65/barrel in 2024, USD53/barrel in 2025 and thereafter, with IRPC's crude procurement costs adjusted for applicable premiums;
- Gross integrated margin, excluding inventory gains/losses, to soften in 2023 and improve in 2024;
- Higher crude run in 2023 on absence of refinery turnaround;
- Capex of THB7 billion-8 billion a year for 2023-2024;
- Credit terms on crude purchases at about 60 days in 2023-2024, with a reduction to the normal 30 days by 2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook could be revised to Stable if EBITDA net leverage decreases to below 5.5x by end-2023 on a sustained basis while PTT's incentive to support remains unchanged.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Weaker operating cash flow than Fitch's expectations, increasing debt-funded investments or high cash distributions to shareholders, resulting in EBITDA net leverage remaining above 5.5x for a sustained period;
- Weakening incentive to support from PTT.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: IRPC had outstanding debt of THB71.7 billion at end-2022, with THB19.8 billion maturing within 12 months, consisting of THB9 billion in short-term borrowings from banks, THB8.8 billion of current portion of long-term loans and THB2 billion in debentures. IRPC plans to issue debentures to refinance these current portions of long-term debt. Liquidity is supported by unrestricted cash of THB3.2 billion and an available credit facility from PTT of THB10 billion. IRPC also had available uncommitted working-capital facilities of THB8.7 billion as of end-2022.
ISSUER PROFILE
IRPC is the first fully integrated refining and petrochemical producer in Thailand. The company, one of PTT's petrochemical subsidiaries, is the country's third-largest oil refinery and petrochemical producer.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
IRPC's rating incorporates a two-notch uplift from its SCP, reflecting our view that its parent PTT has medium operational and strategic incentives to support it.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings