Fitch Ratings (Thailand) has affirmed IRPC Public Company Limited's National Long-Term Rating at 'A-(tha)' and National Short-Term Rating at 'F2(tha)'. The Outlook is Stable. Fitch has also affirmed the 'A-(tha)' rating on IRPC's senior unsecured debentures and THB28 billion medium-term debenture programme.
In addition, Fitch has assigned 'A-(tha)' to IRPC's proposed THB1.0 billion senior unsecured debentures due in 2027. The proposed debentures are rated at the same level IRPC's National Long-Term Rating, as they will constitute its direct, unsecured, unconditional and unsubordinated obligations.
IRPC's ratings continue to benefit from a two notch-uplift from its standalone profile, reflecting our assessment of likelihood of support from its parent, PTT Public Company Limited (AAA(tha)/Stable).
The ratings reflect our expectations of IRPC's financial leverage (net debt/EBITDA) remaining high at around 4x-5x over the next two years, although leverage improved significantly in 2021 on substantially increased operating cash flow. Fitch expects IRPC to raise investments in 2022-2023 to expand the businesses. Reduction of credit terms on crude oil purchases will also keep financial leverage high.
KEY RATING DRIVERS
Higher Headroom for Investment: IRPC's net debt/EBITDA reduced significantly to 1.9x in 2021 (2020:13.5x) on a substantial increase in EBITDA, driven by high stock gains due to a big rise in global crude oil prices. This will provide larger headroom to support an increase in investments despite IRPC's volatile product margins. Fitch expects IRPC's net debt/EBITDA to increase to about 4x-5x in 2022-2023 on higher investments and a gradual reduction of credit terms on crude purchases back to normal 30-day terms by 2024 from 90 days currently.
Earnings to Soften: Fitch expects IRPC's EBITDA to soften to about THB11 billion in 2022 (2021: THB26.8 billion) in the absence of large stock gains and planned refinery turnaround, but remain strong relative to 2019-2020. Local oil consumption should improve in 2022 after declining in 2021. Still, uncertainty over the coronavirus pandemic with potential additional travel restrictions would disrupt the recovery.
Market gross refining margins (excluding inventory gains) are likely to improve in 2022 from 2021 on higher travel and economic activity. Petrochemical spreads are likely to moderate in 2022 on new supply and slower demand growth. Fitch estimates IRPC's EBITDA in 2023 will range between THB15 billion and THB16 billion.
Investment to Rise: Fitch expects IRPC to increase investment after the balance sheet gets stronger. However, capex for a committed project - upgrading plants to meet EURO5 emission standards (UCF project) - will not be large relative to operating cash flow. The company expects to spend about THB10.5 billion on the UCF project over 2022-2024. IRPC also has plans to increase its specialty products, such as advanced polymers for industrial and healthcare sectors, over the next five years. It may use joint ventures and/or acquisitions for this.
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 to IRPC to manage leverage. Credit terms of 90 days from PTT have been extended for another year until end-2022. IRPC plans a gradual reduction in the terms to the normal 30 days over the next three years. However, the company may keep the extended terms if needed to support additional large investments.
Improving Business Profile: Fitch expects IRPC's margin to improve modestly over the medium term, supported by an increase in output of high-value-added products. The start of its polypropylene expansion project, polypropylene inline compound, and ABS powder projects should boost its margin, as these products have wider spreads than commodity-grades. IRPC expects the UCF project to enhance its refining profitability upon completion, scheduled for 2024.
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 a two-notch uplift from its 'bbb(tha)' Standalone Credit Profile (SCP), reflecting our view that parent PTT has 'Medium' incentives to support IRPC under Fitch's Parent and Subsidiaries Linkage Rating criteria. Fitch believes the petrochemical and refinery business, in which IRPC is a vital component, is strategically important to PTT. This underpins our assessment of 'Medium' strategic and operational incentives. The legal incentives are assessed as 'Weak'.
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 IRPC to alleviate cash flow pressure.
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)), 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. However, Fitch believes Esso has stronger parental linkage than IRPC.
IRPC has larger operating scale, and higher upstream integration and product diversification than HMC Polymers Company Limited (A-(tha)/Negative, 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. So IRPC's rating is 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)/Negative, SCP: aa-(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:
- Benchmark Brent crude price at USD70/barrel (bbl) in 2022, USD60/bbl in 2023 and USD53/bbl in 2024 and thereafter, with IRPC's crude procurement costs adjusted for applicable premiums;
- Gross integrated margin, excluding inventory gains, to be relatively stable in 2022-2023;
- Lower crude run in 2022 to reflect refinery turnaround;
- Capex of about THB12 billion in 2022 and THB5 billon-6 billion a year for 2023-2024;
- Credit terms on crude purchases to remain at 90 days in 2022, with a gradual reduction to the normal 30 days by 2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Net debt/EBITDA and funds flow from operations (FFO) net leverage sustained below 4.5x;
- Evidence of stronger ties with PTT.
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 net debt/EBITDA and FFO net leverage remaining above 5.5x for a sustained period;
- Weakening linkage with PTT
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: IRPC had outstanding debt of THB61.2 billion at end-2021, of which THB10.6 billion matures within 12 months. Liquidity is supported by unrestricted cash of THB11.2 billion, available committed working-capital facilities of THB7 billion, and an available credit facility from PTT of THB10.0 billion.
ISSUER PROFILE
IRPC is the first fully integrated refining and petrochemicals 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 receives a two-notch uplift based on our assessment of 'Medium' incentives for support from the parent, PTT.
Additional information is available on www.fitchratings.com