"While the current severe downturn in refining has substantially eroded funds from operations (FFO) and EBITDA in 2009, there are differences in the negative impact this has had on the cash flows and credit metrics of integrated oil companies, refining and marketing (R&M) companies and pure oil refiners," said Arkadiusz Wicik, Director at Fitch's European Energy, Utilities and Regulation team. "Pure refiners have been the worst affected by the refining downturn, while integrated oil companies have been less affected due to oil prices."
The oil price, which is the main cash flow driver for integrated oil companies, averaged about USD60/barrel in 2009-to date, close to Fitch's conservative long-term price assumption, and well above the 10-year average of USD50/bbl.
Fitch believes the current environment, which has affected refining in Europe, the US and Asia due to a combination of depressed demand and a glut of global refining capacity, is increasingly challenging as unlike upstream exploration and production (E&P) activity, which has seen a modest recovery of the oil price since Q209, conditions for refiners worsened considerably in H209 and there are no signs of a recovery yet.
In the first nine months of 2009, complex and well-positioned European refineries reported an EBITDA decline by as much as 50% to 60% y-o-y, while smaller and less efficient ones posted negative EBITDA in what the agency regards as a low point in the cycle within its rating through-the-cycle approach. Fitch believes that a marked deterioration in the credit metrics of refiners that entered 2009 with higher financial leverage (net debt to EBITDA above 2x) could eventually lead to rating downgrades, as several companies have a Negative Outlook or are on Rating Watch Negative.
If the current difficult climate persists in 2010, then negative rating pressure would grow considerably given that Fitch would likely adjust its mid-cycle assumptions downward. Specific rating action would likely vary by individual company, as refiners' ratings reflect their individual reaction to subdued conditions. Fitch would need to assess factors such as additional financial flexibility, if any, in existing capex programmes, operating expenditure, changes in relative feedstock costs, as well as asset disposals to mitigate the negative impact of weaker FFO on credit profiles.
Refiners that increased debt in recent years to fund large acquisitions when refining asset prices were higher, or assumed sizeable capex for refinery upgrades, are in particularly challenging positions given the weak organic cash flows to pay for these programmes. Some of these companies will face hurdles to meet financial covenants included in their debt documentation due to reduced cash flows. Fitch believes that maintenance of a solid liquidity position, for example a large cash balance or undrawn committed credit facilities, may help affected refiners weather a period of eroded cash flows.
On a positive note, results for the first nine months of 2009 show that refining companies with solid fuel marketing operations (retail sales) reported a lower deterioration in cash flows than pure refiners as fuel marketing margins have proved more resilient to the economic downturn than refining margins. Examples of more resilient marketing operations at R&M companies include Poland's largest R&M company, Polski Koncern Naftowy ORLEN S.A. (PKN, 'BB+'/Rating Watch Negative), Turkey's sole refining company, Turkiye Petrol Rafinerileri A.S. (TUPRAS, Long-term local currency IDR of 'BBB-'/Stable), the Romanian operations of The Rompetrol Group N.V. ('B'/Negative) and Turkey's largest fuel distributor Petrol Ofisi A.S. ('BB-'/Stable).
