Dec 13 - The credit Outlook for the North American refining industry is
Stable for 2013, with operating cash flows and credit protections returning to
normalized levels, according to Fitch Ratings. The Stable Outlook is despite
widespread economic weakness and a decline in demand for refined products.
The industry is most likely to move to a Negative Outlook in the case of a sharp
contraction in global product demand. A second risk to the industry's outlook is
the sharp growth in shareholder-friendly initiatives, including buybacks,
dividends, and business separations. While not a problem to date, the risk is
that the industry overcommits cash flows to these activities and depletes its
liquidity just prior to a downturn.
Crude oil spreads continue to dominate sector results given the wide gap between
waterborne and landlocked North American grades. As a result,
location-advantaged refiners in the midcontinent and elsewhere continue to see
outsized profits and cash flows. Fitch anticipates key crude spreads will
persist but decline in size, as increased logistical takeaway capacity
(pipelines, rail, trucking) begin to catch up to output growth in key shale
Fitch believes exports are critical for refiners to maintain profitability in
2013 given the secular decline in U.S. refined product demand. Key competitive
advantages enjoyed by U.S. refiners should continue to provide a meaningful cost
advantage over other refining centers, particularly Europe.
The outlook for higher levels of free cash flow (FCF) remains solid, driven by
reasonable cash flows and generally low mandatory spending across the industry.
At the same time, shareholder-friendly activity has increased sharply,
particularly spinoffs of non-refining business segments into separate
C-corporations and tax-advantaged master limited partnerships (MLPs). From a
credit perspective, these spinoffs are generally a modest negative for a
corporate parent company, but this varies on a case-by-case basis.
The full report '2013 Outlook: North American Refining' is available at
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: 2013 Outlook: North American Refining