KEY RATING DRIVERS
Leverage Improved: Fitch expects Esso's financial leverage, measured by FFO adjusted net leverage, to be sustained at lower-than-previously-expected levels due to lower debt. Strong refining margins in 2016 and 2017 led to solid operating cash flows and reduced the company's debt and financial leverage substantially. Its FFO adjusted net leverage fell to 1.1x in 2017 from 6.1x in 2015. Fitch expects the ratio to remain below 3.0x over 2018-2020, given no major capex and moderate dividend payment.
Strong Parent Support: Fitch believes Esso has strong support from its ultimate parent, Exxon Mobil Corporation (ExxonMobil) and its affiliate. This was evident from the financial support received from the parent group during the period of high financial leverage in 2014. Since then, the proportion of inter-group financing arrangements has remained high at 60%-70% (9M18: 67%), although its total debt and financial leverage have decreased substantially. This has helped Esso to reduce its 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 its operational efficiency. Esso's refinery is ExxonMobil's second-largest refinery in Asia.
No Major Capex: Fitch believes Esso will continue to focus its investments on optimising its integrated value chain, further increasing its crude diversification to enhance margin, rolling out new premium products as well as expanding its retail network. These projects should not require large investment. Fitch expects Esso's capex to stay around THB1.0 billion-THB1.6 billion a year during the next three year (2017: THB 1.2 billion).
Integrated Complex Refiners: The rating also reflects Esso's complex refinery, its established brand name and its favourable access to raw materials via ExxonMobil group, which provides flexibility to vary its crude feedstocks and products depending on the market conditions. The integration of paraxylene (PX) production widens Esso's output range, optimises its product lines, and somewhat reduces the volatility of the company's refining margins, although the current excess regional PX capacity has weakened margins. Esso has a strong, well-established brand name in Thailand's fuel retailing business with 595 services stations at end-October 2018.
Highly Cyclical Business: Esso's credit profile is restrained by the inherent cyclicality of its businesses and its single-production site risk. The volatility of refining margins, oil prices and working-capital requirements could significantly affect its earnings and cash-flow generation.
DERIVATION SUMMARY
Esso's rating reflects the integration of its refinery to petrochemical production and oil retailing business. Esso's business and financial profiles are moderate relative to Thai downstream oil and gas peers. IRPC Public Company Limited ((A-(tha)/Stable), standalone credit profile of BBB+(tha)) has larger refinery and petrochemical operations and generates more EBITDA from the petrochemical business, resulting in higher margins than Esso. However, Esso has stronger credit metrics than IRPC. In addition, we view Esso as having stronger linkages with its ultimate parent, Exxon Mobil Corporation. Esso has much smaller operating scale than PTT Global Chemical Public Company Limited ((AA(tha)/Stable), standalone credit profile of AA-(tha)) and Thai Oil Public Company Limited ((AA-(tha)/Stable),standalone credit profile of A+(tha)) and higher leverage than these two companies.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Crude oil prices (Brent) of USD70 per barrel in 2018, USD65 per barrel in 2019, and USD57.5 thereafter, with Esso's crude procurement costs adjusted for applicable premiums.
- High gross refining margin in 2018, and softer margin in 2019 and thereafter.
- Major turnaround in 2019.
- PX product-to-feed margin to stay flat in 2019 and soften thereafter.
- Maintenance capex and small efficiency improvement projects in 2018-2022.
- 50% dividend payout.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A significant strengthening of its links with ExxonMobil group
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Weakening ownership and support from ExxonMobil group
- Weaker access to bank loans and debt capital market
- Sustained high financial leverage exceeding 6.5x (measured by FFO adjusted net leverage)
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Esso had outstanding debt of THB17.4 billion at end-Sep 2018. Most of THB16.0 billion debt due to mature within 12 months was short-term debt used to finance its working capital. Esso's inventory increased to THB22.0 billion at end-Sep 2018, from THB18.1 billion at end-2017. Esso's liquidity is supported by cash and cash equivalents of THB0.8 billion and available undrawn revolving loan facilities of THB60.3 billion from ExxonMobil group. Esso also has strong access to bank funding.
DATE OF RELEVANT COMMITTEE
26-Nov-2018
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(tha)' for National ratings in Thailand. Specific letter grades are not therefore internationally comparable
Additional information is available on www.fitchratings.com