Oil Refineries Ltd. Table Of Contents

Transcription

1 ... Primary Credit Analyst: Matan Benjamin, Tel Aviv, (972) , Secondary Analyst: Zvi Boimer, Tel Aviv, (972) , June 19, 2013 Table Of Contents... Rationale Outlook Standard & Poor s Base-Case Scenario Company Description Business Profile Financial Profile Liquidity And Covenant Analysis Reconciliation Related Criteria And Research Please note that this translation was made for the company's use only and under no circumstances obligates Standard & Poor's Maalot. In the case of any discrepancy with the official Hebrew version published on June 19, 2013, the Hebrew version shall apply. Standard & Poor s Maalot June 19, 2013 Page 1

2 Oil Refineries Ltd. Corporate Credit Rating ilbbb+/negative Rationale Business Profile Strong competitive position in Israel s energy sector and advanced refining capability as seen in its ability to produce high value-added products. Only partial vertical integration. Focus on high-risk refining sector. Concentration of production in small geographic area and lack of geographic diversification. Financial Profile High leverage for current rating, which we expect will improve in the next two years. Less than adequate liquidity, and company s reliance on local banks to refinance debt. High volatility in profit margins and cash flow. Short-term heavy debt profile. Outlook: Negative The negative outlook reflects the likelihood that we would lower the rating on Oil Refineries Ltd. (ORL) during the next 12 months, if the company shows no significant improvement in its financial performance and if its liquidity deteriorates. For the current rating, we assume that the company will maintain an adjusted debt to EBITDA ratio of about 6.0x over time. Downside scenario We could lower the rating if the debt to EBITDA ratio rises to above 7.0x in 2013 with no expectation of improvement to about 6.0x in In our opinion, this scenario is possible if refining and petrochemical margins deteriorate, if production is lower than expected, if there is a sharp rise in oil prices or if ORL s dividend policy is more aggressive than we anticipate, delaying the process of leverage reduction. Furthermore, we could lower the rating if creditors of subsidiary, Carmel Olefins Ltd. (CAOL), or other creditors decide to call for immediate repayment of debt following a breach of financial covenants. Upside scenario We could revise the outlook to stable if the company manages to reduce the risk of deterioration of its financial profile by settling its relationships with CAOL s creditors, presenting sufficient headroom over its financial covenants, and extending its debt duration. We could also revise the outlook to stable if, in our opinion, the likelihood has improved of the company presenting a debt to EBITDA ratio of 6.0x in 2014, which we regard as commensurate with the rating and if ORL manages to extend its debt profile. Standard & Poor s Maalot June 19, 2013 Page 2

3 Standard & Poor s Base-Case Scenario In our base-case scenario, we anticipate that the company will show adjusted EBITDA of about $400 million in 2013, up from $130 million in In our opinion, this sharp improvement will result from the completion of the hydrocracker project which began operating in January 2013 and from the full use of natural gas from April We also assume that on completion of its investment program, ORL will see an increased capacity to generate cash flow which will support its leverage reduction. Assumptions Refining margin of $7 per barrel in 2013 and $7.5 per barrel in 2014, compared to $4.9 per barrel in Petrochemical margins of about $800 a ton in Maintenance capital expenditure only with no new investments. From 2014 and onwards, distribution of 75% of net profit in line with the company s official dividend policy. Key Metrics* 2012A 2013E 2014E FFO to -1.1% 8%-10% 12%-13% debt Debt to 20.1x 6.5x-7.0x 5.5x-6.0x EBITDA A Actual. E Estimate. *Leverage and coverage ratios include adjustments in respect of long-term operating leasing, advance transactions and sales of inventory and derivatives, in respect of which debt grew in 2012 by $355 million, as well as offsetting surplus cash, by our definition, from reported financial debt of $169 million. Excluding the surplus cash offset from the debt, we do not expected material changes in these adjustments in 2013 and Company Description ORL is an industrial company that produces oil products, polymers used in the plastics sector, aromatic products used in the chemical and petrochemical industries, and basic oils and waxes used also as raw material for various products. Originally a state-owned company, ORL was privatized in 2007 and its shares are traded. Its major shareholders are the Israel Corp. Ltd. (37.08%) and Israel Petrochemical Enterprises Ltd. (IPE; 30.7%). The rest of the shares are held by the public. Business Profile Strong competitive position in Israel, advanced refining capability, limited vertical integration, focus on relatively high-risk refining sector ORL s business risk profile is supported by its strong competitive position in the Israeli market: The company Standard & Poor s Maalot June 19, 2013 Page 3

4 operates the largest refinery in Israel supplying about 55% of the country's total fuel consumption. ORL s business risk profile is also supported by high barriers to entry into the fuel market, including heavy investments required to build a refinery, relative to the size of the domestic economy which does not support continuous import activity. Its business profile is also supported by the relatively advanced refining capability of its production facilities. In early 2013 ORL completed the construction of its hydrocracker manufacturing facility at a cost of about $500 million. The facility allows the company to produce high value-added products using relatively low-level feedstock and crude oil. We also note that the company's cost structure is supported by the use of natural gas, which the company began utilizing at the end of the first quarter of 2013, and which will allow ORL to reduce its use of expensive and polluting combustion material. The company believes this will yield an annual contribution of about $150 million-$200 million. In 2012 operating results improved in the refining sector as global refining margins recovered. From 2009 to early 2012 refining margins declined sharply due to lower demand, a result of weak macroeconomic conditions, and excess supply in the industry. The closure of several refineries and a contraction in supply in 2012 led to an improvement in refining margins, and gave a breathing space to industry players which improved their operating results. We believe that the recovery in margins is not sustainable over time due to the fact that macroeconomic conditions are expected to continue to be weak as a result of structural excess supply. However, we do not expect margins to return to their low level of Conversely, ORL's business profile is constrained, in our opinion, by the fact that it operates mainly in the refining industry, which is relatively high risk as a result of the high volatility in refining margins, partially arising from exogenous factors. Its business profile is also constrained, in our opinion, by its limited vertical integration, through its petrochemical activities, and by the lack of independent crude oil sources, which creates a structural dependency on external suppliers for its crude oil. In our opinion, the company's dependence on a single production site exposes it to risks of operating failure, while geopolitical incidents are another constraining factor. S&P Base-Case Operating Scenario S&P Maalot s base-case operating scenario assumes a significant increase in EBITDA in 2013, as a result of using natural gas from the Tamar field starting the second quarter of 2013, as well as a positive contribution from the hydrocracker facility. We expect that the company will present adjusted EBITDA of $400 million in 2013 and $440 million in The major assumptions underlying our scenario are: Refining margins of $7 a barrel in 2013 and $7.5 in We assume that the Ural Med index, used as a benchmark for the local refining industry, will be about $3 a barrel on average, and that ORL will benefit from the additional contribution on completion of the hydrocracker facility, and the transition to full production using natural gas. We expect that market conditions will continue to be challenging in light of weakness in the macroeconomic environment and excess supply which may affect margins. Nevertheless, we do not expect margins to return Standard & Poor s Maalot June 19, 2013 Page 4

5 to their 2011 levels. Improved margins in the petrochemical industry to reach levels of about $750-$800 a ton in 2013 and 2014, after weak margins recorded in Financial Profile Relatively weak coverage ratios, less-than-adequate liquidity, expected improvement in cash flow generation and modest reduction in leverage We believe ORL has a high financial risk profile, given its: aggressive financial policy in recent years, as seen in very high levels of leverage (debt to EBITDA averaged about 20x in 2011 and 2012); its "less-than-adequate" liquidity, by our definition, which relies on short-term credit lines; and a breach of its financial covenants. We note that the company completed a massive investment program in 2012, and from 2013, we anticipate Standard & Poor s Maalot June 19, 2013 Page 5

6 positive cash flow that can support lowering debt, and improved cash flow. We assume that the company s FFO (funds from operations) in 2013 will reach about $250 million and that its capital expenditure will be about $120 million, without dividends. We anticipate a significant improvement in ORL s credit metrics beginning in 2013 due to a new natural gas supply from the Tamar field, beginning in the second quarter of 2013, a positive contribution from the hydrocracker facility, as well as cost-cutting measures. We believe debt to EBITDA will be about 6.5x in 2013 and about 5.5x in ORL s adjusted debt stood at about $2.6 billion and $2.4 billion as of Dec. 31, 2012 and March 31, 2013, respectively. This level of debt makes ORL a significant credit user in the local market, which obligates it to adopt long-term policies that deal with the high volatility in its financial performance. The company has not yet acted to extend the duration of its debt and it continues its extensive use of short-term sources of finance, including uncommitted credit lines, trade receivables factoring, and extending supplier credit. We expect that ORL s financial debt will likely decline in 2013 and 2014, but this decrease is expected to be moderate in light of the likely dividend distribution in 2014 at the expense of strengthening its capital structure, due to the financing needs of its controlling shareholder, IPE. S&P Base-Case Cash Flow And Capital Structure Scenario Less-than-adequate liquidity, by our definition, and a reliance on short-term uncommitted credit lines. Tight headroom over the financial covenants expected over the next few years. Capital investments sufficient to maintain current capacity only. Dividends of 75% of net income in accordance with the company s declared policy from Standard & Poor s Maalot June 19, 2013 Page 6

7 Liquidity And Covenant Analysis: Liquidity Profile Less Than Adequate Dependent on refinancing in order to meet repayments due 2014 ORL s liquidity is "less than adequate", according to our methodology. We estimate the ratio of sources to uses at about 0.5x in This assessment is based on the company s dependence on short-term funding sources and an oft-repeated breach of its financial covenants. In our opinion, any change in the banks readiness to refinance the ORL s credit will adversely affect the company's liquidity profile. At the end of the first quarter of 2013 ORL did not meet its obligations towards its private bondholders to maintain a minimum capital level of 19% of balance sheet total (though this exposure is to a bond debt of only about $30 million). We note that failure to meet this condition for more than two consecutive quarters is a cause for immediate repayment under the terms of the trust deed. Also, bonds from its subsidiary, CAOL, include a covenant which grants bondholders the right to call for immediate repayment if CAOL s rating is lowered by a further notch. While we view positively the steps that the company has taken to reach agreements with all its creditors and to prevent a situation of a demand to accelerate debt repayment, we believe that there is still a risk of deterioration in ORL s financial profile following a demand for immediate repayment of liabilities from one side of the creditors. Standard & Poor s Maalot June 19, 2013 Page 7

8 Principal Liquidity Sources Cash and cash equivalents of about $270 million, about $100 million of which are required, in our opinion, for continuing operations; Cash flow from operating activities of about $290 million in 2013 and $320 million in 2014; Receipts for credit derivatives of $35 million in 2013; And loan repayment in respect of employee liabilities of about $10 million in 2013 and Principal Liquidity Uses $650 million under the credit facilities and trade receivables discount program; Debt maturities of about $360 million in 2013 and $295 million in 2014; Investments of about $200 million by the end of 2014; And dividends of about $75 million in Oil Refineries Ltd. Debt maturities* as of Dec. 31, 2012 (Mil. $) and thereafter Maturities 926* *Including short-term facilities of $566 million. Reconciliation In order to compare the company s data with those of other rated companies, we make adjustments to Oil Refineries reported financial data in calculating the financial metrics. The main adjustments we made to 2012 data are: Offsetting cash flow surplus, according to our definition, from the reported financial debt. Discounting long-term operating leases and adding them to reported debt. Adjusting advance transactions, derivatives, pensions and inventory to financial debt. Standard & Poor s Maalot June 19, 2013 Page 8

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10 Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Rating Details (As Of June 19, 2013) Oil Refineries Ltd. Corporate Credit Rating ilbbb+/negative Bond Series A, B, C ilbbb+ Rating History December-2012 ilbbb+/negative May-2012 ilbbb+/stable November-2011 ila-/watch Neg March 2010 ila-/stable Primary Credit Analyst: Matan Benjamin, Tel Aviv, (972) , matan.benjamin@standardandpoors.com Secondary Analyst: Zvi Boimer, Tel Aviv, (972) , zvi.boimer@standardandpoors.com Standard & Poor's Maalot ratings are based on information received from the Company and from other sources that Standard & Poor's Maalot believes to be reliable. Standard & Poor's Maalot does not audit the information it receives nor does it verify the correctness or completeness of such information. It is hereby clarified that Standard & Poor's Maalot rating does not reflect risks relating to and/or arising from breaches, through intent or oversight, of any of the obligations included in the bond documents and/or the incorrectness or inaccuracy of any of the representations contained in the documents relating to the bond offering that is the subject of this rating, Standard & Poor's Maalot report or the facts that form the basis for the opinions expressed to Standard & Poor's Maalot as a condition for the giving of the rating, fraudulent or dishonest acts of commission or omission, or any other act that contravenes the law. The ratings could be revised as a result of changes to the information received or for other reasons. The rating should not be perceived as expressing any opinion concerning the price of the securities on the primary or secondary market. The rating should not be perceived as expressing any opinion concerning the advisability of buying, selling or holding any security. Standard & Poor's Maalot reserves all rights. This summary is not to be copied, photographed, distributed or used for any commercial purpose without Standard & Poor's Maalot consent, except to provide a copy of the whole report (with an acknowledgement of its source) to potential investors in the bonds that are the subject of this rating report for the purpose of their reaching a decision concerning the acquisition of the aforesaid bonds. Standard & Poor s Maalot June 19, 2013 Page 10