(The following was released by the rating agency)
-- We consider that Caltex’s overall funding strategy for its supply chain restructure would mitigate the project execution risk, and is supportive of the company’s “modest” financial risk profile.
-- In addition, Caltex has raised A$550 million of hybrid securities, which receives 50% equity credit from Standard & Poor‘s.
-- As a result, we have affirmed the ‘BBB+/A-2’ corporate credit rating on the company, ‘BBB+’ rating on the senior unsecured debt , and ‘BBB-’ rating on the hybrid securities.
-- At the same time, we have removed the ratings from CreditWatch with negative implications.
-- The stable outlook reflects our expectation that company will exercise its financial levers--as seen in its track record--should the operating environment be weaker than expected.
On Sept. 25, 2012, Standard & Poor’s Ratings Services affirmed its ‘BBB+/A-2’ corporate credit rating on Caltex Australia Ltd. We also affirmed our ‘BBB+’ rating on the company’s senior secured debts and ‘BBB-’ rating on Caltex’s hybrid securities. At the same time, we have removed all ratings from CreditWatch with negative implications, where they were placed on July 26, 2012. The outlook is stable.
The affirmation reflects our view that Caltex would maintain its “modest” financial risk profile despite the increasing funding requirements to close its Kurnell refinery and convert it to a major import terminal. In addition to a recent issuance of A$550 million hybrid securities (which receives 50% equity credit from Standard & Poor‘s), the company also announced a lower dividend payout range of 20% to 40%, from 40% to 60% previously. This will preserve cash and boost its liquidity during its supply chain restructure in the next few years.
Should the operating environment deteriorate, we also believe that Caltex can reduce its discretionary capital expenditure without materially affecting its earnings in the near term. The company could defer its capital expenditure plans such as its retail network expansion and site upgrade. In addition, about half of the budgeted capital expenditure is growth related, which could be postponed amid a tough trading environment. Caltex’s year-to-date refiner margin is slightly better than expected, due to stable refinery operations without unplanned outages and a higher Caltex refiner margin. We also expect its marketing business earnings to continue to perform strongly. As such, we expect Caltex’s adjusted funds from operations (FFO)/debt to be higher than 40% and adjusted debt to EBITDA lower than 2x in 2012.
We continue to view Caltex’s business risk profile as “satisfactory”, reflecting its strong market position in downstream petroleum refining, distribution, and marketing. In Australia, the company accounts for about a third of the petroleum-product refining market. It also supplies more than 30% of the retail fuel market (including co-branded sites with Woolworths Ltd. ) and the commercial diesel and jet fuel market, leading its main competitors Shell Australia Ltd., B.P. Australia Holdings Ltd., and 7-11. The increasing earnings contribution from Caltex’s nonrefining business-including transport-fuel marketing, lubricants and specialties, and non-fuel income-has increased the company’s cash flow diversity and stability. We believe this is particularly important when selling petrol has low profitability, especially during cyclical downturns.
However, Caltex remains exposed to asset-quality and asset-concentration risk at its two refineries. The financial and operational impact of recent stoppages highlights Caltex’s asset concentration, which remains a key credit sensitivity for the ‘BBB+’ rating. Nonetheless, we consider that Caltex’s business risk profile would benefit from the restructure in the long run. The anticipated favorable supply agreement with Chevron Corp. (AA/Stable/A-1+) and the closure of the Kurnell refinery would reduce Caltex’s operating losses in its refinery business and the volatility in its earnings and operations. However, the company may face execution risks associated with the restructuring in the near term.
In our view, Caltex’s liquidity is “strong”, based on our criteria (see Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, published to Global Credit Portal on Sept. 28, 2011). Relevant aspects of our assessment of the company’s liquidity profile are:
-- We expect that Caltex’s sources of liquidity in fiscal 2012 will exceed uses by 1.5x.
-- The company has no major debt maturing until April 2014.
-- As at June 30, 2012, Caltex had almost A$1.1 billion of undrawn committed facilities. In addition, its cash holding will increase significantly with the proceeds of the A$550 million hybrid issuance.
-- The company’s policy is to maintain undrawn committed facilities of at least A$350 million over its peak debt load, given the volatile industry the company operates in.
The stable rating outlook is based on our view of the strength of the company’s marketing business. The outlook also reflects Caltex’s track record of maintaining a conservative balance sheet, and our expectation that Caltex would utilize financial levers (such as reducing discretionary capital expenditure and dividend payments) to manage leverage and cash-flow-protection metrics should the operating environment deteriorate. We believe the potential execution risk associated with the company’s supply chain restructure underpins the importance of the company maintaining conservative financial metrics and a flexible approach to capital management.
The rating could come under negative pressure if Caltex’s FFO-to-debt ratio falls to less than 40% and its debt-to-EBITDA ratio moved to higher than 2x. Negative free-operating cash flow would also be negative for the rating. Caltex remains exposed to significant asset-concentration and operational risks that could pressure the ratings should a material deterioration in operating reliability occur.
In our opinion, a higher rating is less likely in the near term until Caltex completes the restructure of its supply chain and moderates its earnings volatility. We would also need to consider the company’s potential capital restructure under the new business structure.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Caltex Australia Ltd.
Corporate Credit Rating BBB+/Stable/A-2 BBB+/Watch Neg/A-2
Caltex Australia Ltd.
Senior Unsecured BBB+ BBB+/Watch Neg
Subordinated BBB- BBB-/Watch Neg