“The rating for Petron Corporation’s (Petron) over-all creditworthiness is PRS Aaa (corp.),” PhilRatings announced. A rating of PRS Aaa (corp.) is defined as: “A company rated PRS Aaa has a VERY STRONG capacity to meet its financial commitments relative to that of other Philippine corporates.” A PRS Aaa is the highest rating that can be assigned on the PhilRatings rating scale.
In assigning the rating, the following key strengths are reflected: solid market leadership in the domestic fuels market despite heightened competition; sustained earnings and cash flow generation, providing strong coverage of interest and debt service; implementation of a diversification strategy which will provide growth opportunities; reliable crude supply from Saudi Aramco; and management’s adequate handling of Petron’s moderate debt profile.
Petron is the largest domestic petroleum refining and marketing firm in the Philippines, with an estimated over-all market share of 38% in 2005. Petron’s refinery in Limay, Bataan, has a primary distillation capacity of 180,000 barrels per day (bpd). Even after the full deregulation of the downstream oil industry in 1998-1999, the company has proven its leadership in the sector, competing effectively with both large and small players in the market and continuing to enhance its position, even amid shrinking domestic demand.
Petron’s very strong credit profile reflects expectations that the company will maintain its stable interest and debt coverage measures as it pursues its diversification strategy. Petron’s ratio of pre-tax earnings (before depreciation) to interest averaged 6.5x in 2001-2004. Cash flow generation has likewise remained positive despite the impact of rising crude prices on working capital. Over the long-term, management’s strategy of developing its non-fuel business (i.e. production of high valued petrochemical feedstock for the export and domestic markets) provides confidence regarding future earnings growth and improved cash flow generation in a scenario of softening domestic demand for petroleum products.
The company’s long-term crude supply arrangement with Saudi Aramco, the world’s largest crude supplier and a 40% equity partner in Petron through its subsidiary, Aramco Overseas Company BV (AOC), provides reasonable assurance of crude supply even as geopolitical factors pose potential global supply constraints in the near- to medium-term. While price volatility in crude and refinery products remains a significant event risk, market deregulation has allowed industry players to pass on most of the price increases to end-consumers.
Petron’s debt level, though still significant, given interest-bearing debt to total capital of 46%, has already posted some improvement, having come down from a high of 62% in 2000. Only 23% of total debt is in foreign currency so foreign currency exchange risk is manageable considering Petron’s forward currency contracts and export earnings. Although crude costs are also in foreign currency, the company is able to pass on changes in the foreign exchange rate through its pricing mechanism.
Revenue generation has been healthy in the last three years, growing by 33% in 2004 and by about 32% in January to September 2005. Petron has been able to grow its revenues in both the retail and industrial trades. Domestic consumption of petroleum products, however, has declined from a peak of 132 million barrels in 1998 to 109 million barrels in 2005. The contraction was due mainly to a shift in the mix of electricity generation towards coal and natural gas. The decline in Petron’s volume, though, was less than that for the industry, enabling the company to gain market share. Net income for the first nine months of 2005 was at P4.8 billion, up heftily from 2004’s P2.4 billion. Cash level was at about P5.5 billion as of end-September 2005, with total short-term assets providing a 1.22x cover of short-term liabilities.