Global oil refining faces significant challenges: Fitch

16 Jul 2009

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The global oil refining industry faces significant challenges in the near- to medium-term due to a sharp deterioration in the global supply / demand balance for refined products, Fitch Ratings said in a special report.

The agency projects a substantial weakening in funds from operations (FFO) and the credit metrics of refining companies in 2009 and 2010, driven by lower refinery utilisation rates and weaker refining margins, compared with the solid results reported in the last refining upturn between 2005 and 2008.

Fitch does not currently expect to take any negative industry-wide rating actions, as it continues to rate refining companies "through the cycle" - and hence the agency's cash flow and leverage forecasts are based on mid-cycle (normalised) assumptions.

"Fitch expects that for many refiners, weaker, cyclicality-driven, FFO will be partly mitigated by implementation of more conservative financial policies with capital expenditure cuts and reduced cash distribution to shareholders," said Arkadiusz Wicik, director at Fitch's corporates team.

"However, if the current downturn in refining proves to be more protracted, with longer and more severe deterioration in refiners' FFO than currently envisaged by the agency, it may put pressure on mid-cycle assumptions and hence the ratings of some refiners."

Out of the 13 refining companies rated by Fitch on an international rating scale, two European entities (Polski Koncern Naftowy ORLEN and The Rompetrol Group were downgraded by one notch since the refining downturn began. Currently, eight refining companies have a stable outlook while the remaining five are on negative outlook. The negative outlook mostly reflects high financial leverage and/or substantial capex programmes over the next few years in a weaker cash flow environment.

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