TRIS rating has affirmed the company rating of ESSO (Thailand) PLC (ESSO) at “A+” with “stable” outlook. The rating reflects the strong linkage between ESSO and the ExxonMobil Group, efficient and integrated refinery and aromatics plant, and its strong position in retail marketing. The rating is constrained by the high volatility inherent in the petroleum and petrochemical industries, as well as fierce competition in retail business.
The “stable” outlook embeds the strong linkage between ESSO and the ExxonMobil Group, together with the anticipated benefits it receives from the Group, particularly financial support, which will help ESSO weather the high volatility of petroleum and petrochemical industries. The company is also expected to maintain its sound market positions in the petroleum business in Thailand. Over the next one to two years, the chance of a rating upgrade is limited due to the volatility of oil prices plus the oversupply of paraxylene (PX). However, ESSO’s rating could be downgraded if the company fails to secure ongoing support from the ExxonMobil Group, or if the ExxonMobil Group dilutes its majority stake in ESSO.
ESSO is the Thailand-based affiliate of Exxon Mobil Corporation (ExxonMobil), which is one of the world’s largest oil refiners and petrochemical companies. ESSO has a long track record in the petroleum business in Thailand. The company and its affiliates began in the oil business in Thailand in 1894 and opened a refinery in 1971. As of March 2016, ESSO’s major shareholders comprised ExxonMobil Asia Holding Pte. Ltd. (66%) and Vayupak Fund 1 (7%).
ESSO’s business profile is very strong. The company’s core operations comprise two business segments, which are oil refining and marketing segment and petrochemical segment. In the oil refining and marketing segment, ESSO owns a complex oil refinery, and it operates retail services stations. The company operates one of the 23 refineries run by ExxonMobil affiliates worldwide. ESSO also manufactures and distributes petrochemical products, primarily aromatics.
The rating is reflective of ESSO’s numerous strong linkages with the ExxonMobil Group, including commercial, operational, financial, and reputational aspects. As an affiliate of ExxonMobil, ESSO benefits from carrying out the group’s advanced refinery technology and expertise, as well as operational and engineering services. Moreover, ESSO is able to leverage ExxonMobil’s global network of crude oil procurement and finished products distribution. The company distributes its refined products, under the Esso brand, through ESSO’s network to commercial and retail customers. Further, ESSO obtains financial support from the Group, which enhances its financial flexibility.
The rating also incorporates ESSO’s efficient and integrated refinery and aromatics plant. ESSO operates a complex refinery with a maximum rated capacity of 174 thousand barrels per day (KBD), accounting for approximately 16% of the total refinery capacity in Thailand. ESSO also operates an aromatics plant, which is integrated with its refinery. The aromatics plant has a production capacity of 500 thousand tonnes per annum (KTA) of PX. ESSO benefits from the integration of the refinery and the aromatics plant, which gives the company the flexibility to adjust the product mix of petroleum and petrochemical products. In 2015, ESSO’s refinery product mix was diesel (37.2%), gasoline (19.3%), reformate (13.0%), fuel oil (9.0%), jet fuel (8.1%), and others (13.4%). With ExxonMobil’s technology and operating philosophy, ESSO’s refinery is in the top tier of energy efficient plants in the Asia-Pacific region, with high operational reliability.
The rating of ESSO also recognizes the company’s strong position in retail marketing, backed by recognizable brand name, extensive distribution network, and operational efficiency of service stations as measured by sales volume per station. ESSO’s strong market position is underpinned by its recognizable brand name, which enables the company to market premium oil and related products. Further, ESSO has an extensive distribution network of service stations. As of September 2016, there were 537 service stations operating under the “Esso” brand name. For the first nine months of 2016, ESSO’s network of service stations was the third-largest retailer in terms of fuel sold through service stations. In addition, ESSO’s service stations are capable of generating relatively high volume per station compared with most of its peers. ESSO’s strong retail helps ease the adverse impact from the oil cyclicality.
On the contrary, the rating is constrained by the high volatility inherent in the petroleum and petrochemical industries. The rating is also tempered by stiff competition in the retail business. Although lower retail oil prices have heightened demand and raised consumptions, fierce competition in retail is undergoing on account of increasing number of service stations by operators.
ESSO’s oil refining and marketing segment accounts for the majority of its revenue. About 90% of ESSO's revenue stemmed from the oil refining and marketing segment and about 10% from the petrochemical segment. Revenue in 2015 totaled Bt169,891 million, dropping by 23% year-on-year (y-o-y) compared with revenue in 2014. Revenue fell because the prices of oil and PX were lower in 2015, but the price drops were partially offset by an increase in the volume of oil sold. For the first nine months of 2016, revenue declined to Bt110,066 million, down by 15% y-o-y. Oil and PX prices were lower in the first nine months of 2016 and the sales volume of oil fell due to scheduled maintenance activities in the third quarter of the year. Despite the fall in revenue, profitability improved for the first nine months of 2016. Offsetting the effects of a planned shutdown in 2016, ESSO recorded a favorable inventory impact of oil and a rise in the margin of PX compared with the same period in 2015. Operating profit was Bt5,188 million for the first nine months of 2016, well ahead of the operating profit of Bt1,758 million earned for the first nine months of 2015 and of Bt2,322 million earned for all of 2015. The improvement in operating profit in the first three quarters of 2016 was from the oil refining and marketing segment, which posted an operating profit of Bt6,263 million. The petrochemical segment continued to operate at a loss, amounting to Bt1,075 million for the first nine months of 2016, due to an oversupply of PX.
As of September 2016, the company’s total debt stood at Bt24,877 million. About 63% of the total debt was granted by the ExxonMobil Group, up from about 0.5% at the end of 2011. The financial support helped enhance ESSO’s financial flexibility. On top of the outstanding inter-company debt, the ExxonMobil Group also provides credit facility of Bt54,000 million to ESSO, which currently remains undrawn. This facility will expire at the end of 2016 but will be renewable for another three years. As of September 2016, ESSO’s debt to capitalization ratio was 57.7%. This ratio is expected to gradually improve to 50%-55% over the next three years, assuming no further significant drops in crude oil prices and no sizable investments. The company’s EBITDA (earnings before interest, tax, depreciation and amortization) is expected to stay above Bt4,000 million per annum on average during 2017-2019, while the capital expenditures are expected at about Bt1,400-Bt1,600 million per annum. TRIS Rating is of the view that ESSO’s debt service ability is still consistent with its rating category due to the strong support it receives from the ExxonMobil Group.
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