GS Caltex controls about 30% of the domestic market and is a major petrochemical producer.
We believe the company is one of the most complex refiners in Asia after five years of
continuous investment in its facilities. We believe GS Caltex's upgraded refining facilities
will increase its gains compared with the past.
We expect GS Caltex to invest in an upgrade of an additional unit in the next one to two
years that would further improve its product mix. Still, we believe the scale of its average
annual capital investments will decline over the next two years to below Korean won (KRW) 1.0
trillion per year, compared with an average of KRW1.5 trillion each year from 2007 to 2010.
We also see a high likelihood of GS Caltex receiving extraordinary financial support from
Chevron in the event of financial distress, given that Chevron holds a 50% stake in GS Caltex
and regards the company as a strategically important downstream asset in Asia. GS Caltex
accounts for nearly half of Chevron's refining capacity in Asia. In addition, Chevron has a
track record of providing GS Caltex with financial support through the extension of a credit
line in times of financial crisis.
Nonetheless, the cyclical character of GS Caltex's main businesses constrains its credit
quality, as does its vulnerability to crude oil prices and currency exchange rates, which weigh
on its cash flow. This, in our view, increases the company's difficulty in formulating a solid
Furthermore, we think uncertainty about regulatory pressure in the domestic market is
rising, as evidenced by a roughly 5% cut in domestic retail petroleum prices for three months
from early April 2011. We believe that GS Caltex and three other Korean refiners took the action
to avoid direct regulatory measures over increasing government concern about inflation. We
believe the government might be tempted to regulate Korean oil R&M companies, including GS
Caltex, directly or indirectly if inflation becomes imminent as a result of higher oil prices or
if refiners reap large profits as in 2011.
We see little headroom in the company's financial risk profile, which we assess as
"significant," at the current ratings. In our view, this constraint is due to reduced operating
cash flow and still considerable investment to upgrade its facilities this year. We expect
investment to decline next year, when the company should benefit from past upgrades to its
facilities. Still, we expect the ratio of the company's debt to EBITDA to exceed our downgrade
trigger of 4.0x over the next 12 months unless GS Caltex reduces its debts using a significant
portion of KRW1.5 trillion in proceeds it received from the disposal of noncore investments this
GS Caltex's overall liquidity is "adequate." We expect the company's sources of liquidity to
exceed 1.2x uses this year.
We assume GS Caltex's sources of liquidity this year will be as follows:
-- KRW0.6 trillion in cash and short term investments as of Dec. 31, 2011;
-- KRW1.4 trillion in cash flow from operations;
-- KRW5.1 trillion in lines of credit as of Dec. 31, 2011.
We assume the company's uses of liquidity this year will be as follows:
-- KRW1.1 trillion in capital expenditures and equity investments;
-- KRW4.0 trillion in debt due to mature within a year from Dec. 31, 2011;
-- KRW0.5 trillion in dividend distributions.
The negative outlook reflects our view that continued high debt levels have weakened GS
Caltex's ability to withstand tougher industry conditions. The likelihood that its debt to
EBITDA will breach our triggers over the next 12 months has increased, in our view.
We may lower the ratings if adjusted total debt to EBITDA reaches or exceeds 4.0x over the
next 12 months. Weaker-than-expected refining margins, unplanned increases in capital
investment, or smaller-than-expected debt reduction through asset disposals could further
pressure the ratings. We may revise the outlook to stable if adjusted total debt to EBITDA stays
below 3.5x for a protracted period. Stronger-than-expected refining margins, a significant
reduction in capital investment, or greater-than-expected debt reduction through asset disposals
could lead us to revise the outlook to stable.