Fitch Ratings (Thailand) has affirmed IRPC Public Company Limited's (IRPC) National Long-Term Rating, senior unsecured rating, and the ratings on its senior unsecured debentures at 'BBB+(tha)'. The Outlook is Stable. Fitch has affirmed the National Short-Term Rating at 'F2(tha)'. Simultaneously, Fitch has withdrawn the ratings.
The rating affirmation reflects Fitch's expectation that IRPC's financial leverage is on track to decrease to below the negative threshold of 6.5x by 2025, supported by a recovery in operating cash flows and lower capex.
IRPC's 'BBB+(tha)' rating benefits from a two-notch uplift from its 'bbb-(tha)' Standalone Credit Profile (SCP), reflecting our assessment of the likelihood of support from its stronger parent, PTT Public Company Limited (AAA(tha)/Stable).
Fitch has chosen to withdraw the rating for commercial reasons.
KEY RATING DRIVERS
Continued Deleveraging: We expect EBITDA net leverage to improve to about 8x by end-2024, from 9.1x in the year to end-1H24 (2023: 12.5x), still above our 6.5x negative rating sensitivity, on a gradual cash flow recovery and lower capex. We expect the ratio to fall below 6.5x in 2025 on better operating cash flow, but weaker demand or margins than we expect could delay the decline. Fitch forecasts net leverage to fall to about 5x in 2026, but it could be higher if EBITDA remains below THB10 billion. The high net leverage in 2023 was due to weak earnings and high debt from higher-than-expected capex.
Slow Petrochemical Recovery: We expect petrochemical spreads to remain weak in 2024, despite some recovery from 2023 lows. We expect uncertain Chinese demand, softening global growth, and ongoing industry overcapacity to weigh on petrochemical spreads. Consumer demand in APAC is likely to be sluggish, particularly as we see China's GDP growth remaining below pre Covid-19 pandemic levels until at least 2026. New capacity is likely to continue to come on line, especially in polypropylene. We expect the pace of new capacity additions to abate after 2024, and support a margin recovery thereafter.
Earnings Improvement: Fitch expects IRPC's EBITDA to improve to around THB8.5 billion in 2024 (1H24: THB5.2 billion) from the exceptionally weak level in 2023 (THB 5.2 billion). This should be supported by a gradual recovery in petrochemical spread from the weak level in 2023 and resilience in the refinery business. EBITDA is likely to rebound further to about THB10 billion in 2025 on an improved demand-supply balance in petrochemical industry. We expect IRPC's gross refining margin to remain resilient in 2025, at around USD5-USD5.5/barrel (bbl).
Moderate Capex: IRPC is likely to focus only on committed capex during 2024-2025, mainly the ultra-clean fuel (UCF) project to upgrade its refinery to meet Euro 5 emission standards, and maintenance capex in light of the weak market conditions and the company's high leverage. IRPC plans to spend about THB6 billion in 2024 and THB1.1 billion in 2025, down from THB12 billion in 2023. However, Fitch believes that the company will raise investment once the balance sheet strengthens, to boost exposure to specialty products.
Extended Credit Terms to Continue: Fitch expects IRPC to maintain its credit terms on crude purchases from PTT, its largest shareholder, at about 90 days at least until 2025. IRPC raised the terms to about 90 days on average in 2023. This, together with lower oil prices and lower receivables from the Oil Fuel Fund, resulted in THB13.8 billion of inflows from the working-capital change in 2023 to partly offset weak EBITDA and higher capex. The 90-day credit terms have been extended for another year until end-2024, and can be extended further upon mutual agreement.
UCF to Improve Complexity: IRPC expects the UCF project, which started commercial operation in 1Q24, to increase its refining upgrading units and refinery complexity upon completion. The Nelson Complexity Index will increase to 9.6 from 8.6, according to the company, which should support stronger refining margins through the cycle.
Fully Integrated Refinery: IRPC benefits from its fully integrated refining and petrochemical operations with 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. However, refining remains a key revenue contributor, at about 80% of net sales in 2023. IRPC aims to raise its high-value-added products to 38% of total polymer sales volume in 2024 (2023: 33%).
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 affect earnings and cash flow generation significantly.
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 leverage is high. IRPC has larger operating scale, and greater upstream integration and product diversification than HMC Polymers Company Limited (BBB+(tha)/Negative, SCP: bbb (tha)). However, HMC is more advanced in product and technology, and generates higher margins, even excluding the refinery business, due to its focus on differentiated and specialty products.
This, together with our expectations of stronger credit metrics - in line with the historical trend - results in HMC's SCP being one notch higher than that of IRPC. However, HMC faces risks associated with high leverage over the next two to three years, as reflected in the Negative Outlook on its rating.
IRPC's refinery is less complex and smaller than that of Thai Oil Public Company Limited (TOP, A+(tha)/Stable, 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)/Negative, 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 USD80/bbl in 2024, USD70/bbl in 2025, USD65/bbl in 2026, USD65/bbl in 2027, USD60/bbl in 2028 and thereafter, with IRPC's crude procurement costs adjusted for applicable premiums;
- Crude run at 192,000 to 195,000 barrels a day in 2024-2025
- Gross integrated margin (refinery and petchem), excluding inventory gains/losses, to improve marginally in 2024 and expand further in 2025, but remain below the historical average;
- Capex of about THB6 billion in 2024 and THB2 billion- 4 billion a year thereafter;
- Credit terms on crude purchases at about 90 days in 2024-2025, with a gradual reduction to the normal 30 days by 2027.
RATING SENSITIVITIES
No longer relevant, as the ratings have been withdrawn.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: IRPC had outstanding debt of THB71.1 billion at end-2023, with THB18.1 billion maturing within 12 months, consisting of THB7.2 billion in short-term borrowings from banks, THB8.9 billion of current portion of long-term loans and THB2 billion in debentures. IRPC plans to raise THB12 billion of bank loans, of which THB9 billion has been granted, to refinance the current portion of long-term debt. Liquidity is supported by unrestricted cash of THB6.2 billion and an available credit facility from PTT of THB10 billion. IRPC also had available committed working-capital facilities of THB3.6 billion as of June 2024.
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 incorporates a two-notch uplift from its SCP, reflecting our view that its parent PTT has medium operational and strategic incentives to support it.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.