[ET Net News Agency, 26 November 2018] Moody's Investors Service said that regional
stress will constrain the earnings of Asian refining and marketing (R&M) companies over
the next 12 months.
"Asian refiners will likely see their earnings fall in 2019, as higher regional crude
prices drive up feedstock cost, and retail fuel price regulation in some countries
pressures marketing profits," said Rachel Chua, a Moody's Assistant Vice President and
Analyst.
"These regional headwinds will drive a 3%-4% decline in aggregated EBITDA through 2019.
The EBITDA decline would have been higher if not for continuing modest demand growth in
Asia," added Chua.
The falling EBITDA contrasts with Moody's positive outlook for the global R&M sector,
with the global outlook reflecting projected EBITDA growth, helped by lower crude prices
and strong distillate spreads in North America.
Moody's analysis is contained in its just-released report titled "Refining & Marketing -
Asia: Regional stress will constrain earnings of Asian refiners," and is authored by
Chua.
Moody's report explains that higher feedstock costs will constrain refining margins in
Asia, with the price premium of regional Dubai crude over West Texas Intermediate crude
widening to in excess of $8 per barrel in October 2018; the highest level since early
2015.
Moody's expects that the benchmark Singapore complex refining margin will stay benign,
at $5.5 per barrel over the next 12 months, largely in line with the year-to-date average.
Moody's projection also accounts for mounting Chinese petroleum exports into the Asian
market, which are in direct competition with other export-oriented Asian refiners.
Nonetheless, the Singapore complex refining margin could benefit from some upside
starting in the second half of 2019, as stricter global sulfur limits for shipping fuel
from January 2020 will spark demand for diesel.
Moody's also said that the reintroduction of fuel subsidies will squeeze marketing
margins. Specifically, oil marketing companies in India and Indonesia have been asked by
their governments to sell petrol and diesel to consumers at subsidized prices, for which
they will not receive any reimbursements.
The re-emergence of fuel subsidies could extend to more Asian countries if the oil price
rally persists.
Moody's also said that the R&M companies' large investments and high working capital
levels will raise total borrowings. In particular, Moody's said that Asian refiners will
push ahead with large investment plans aimed at boosting profitability and improving
resilience to volatility in refining margins.
High capital spending and limited flexibility to scale back dividends will likely result
in continued negative free cash flow generation for many rated refiners, which they will
have to address with external borrowings.
Moody's also expects that the refiners will increase their reliance on short-term debt,
as working capital needs rise in tandem with crude prices. Nonetheless, Moody's said that
rated refiners should have access to credit facilities, given their strong banking
relationships. (KL)