Petroplus, still praying for a distillate recovery | FT Alphaville

Petroplus, still praying for a distillate recovery

Europe’s largest independent refiner, Swiss-based Petroplus, announced a capital raising on Wednesday consisting of a $400m from a senior-note issue, a $150m convertible bond issue and a CHF290m new share issue to boost the firm’s capital and support its acquisition campaign.

Although, judging by the CFO Karyn Ovelmen’s statement, it might have more to do with the former than the latter. As Ovelmen stated on Wednesday:

In addition, the rights issue will increase our short term liquidity and provide balance sheet flexibility to support our business strategy, including value-enhancing acquisitions.

Investors should be mindful that the news comes a month after the Zug-based business surprised the market by posting better than expected second half results — net income of $205m versus a $161.5m expectation — on ‘reliable refinery operations’ and a reduction in oil inventories.

While shares in Petroplus gained on the news back in August, analysts were quick to warn the results did not mean the company — under pressure from weak refining margins — was out of the woods just yet. Petroplus, which has very high levels of middle distillate output, was also quick to base much of its upbeat outlook on a return in demand for middle-distillate fuels in the second half. That’s not the case yet.

Commenting at the time Barclays Capital suggested their view was perhaps too optimistic:

We agree — but the supply-demand dynamics suggest it may be several years before equilibrium is restored.

And on that note S&P also revised its outlook on the Swiss refiner to negative from stable back in May, while keeping ratings unchanged at ‘BB’. The ratings agency further warned the group’s working capital outflow over the past six months had been much higher than previously expected, while its cash position had been reduced by an increase in short-term debt. Specifically they noted:

At the end of the first quarter of 2009, Petroplus’ financial debt stood at $2 billion, a rise of about $90 million over the quarter. At the same time, cash balances diminished by $115 million to only $45 million. According to the company, this was because reported funds from operations of $65 million did not cover an unexpected large working capital outflow of $281 million. We understand, however, that the rise in working capital outflow may be partly due to temporarily higher inventories and prepayments of insurance. We believe that the possibility of further negative free operating cash in the coming quarters has increased, which is likely to put pressure on the ratings.

In other words, Petroplus was seen as coming up against some hefty working capital pressure unless product margins improved significantly in the year. What’s more S&P noted the group’s cash balances had diminished by $115m to only $45m in the first quarter. That, of course, improved by the June results, when the company said it had “ended the quarter with approximately $300m  in cash and no short-term borrowings under our working capital facility.”

However, we would stress that increase was primarily driven by a decrease in paid inventory held and the finalisation of a new receivables factoring agreement of up to $250m– ie, a facility to access cash up front, at a cost.  That agreement had resulted in the sale of oil major receivables, according to Wednesday’s prospectus,  and also been utilitised by $172m by June 30.

The firm’s $3bn inventory revolving credit facility, meanwhile, —  its main source of short-term working capital financing — is set to terminate December 21, 2009 , with the company still negotiating a renewal.

We imagine those negotiations would be highly focused on Petroplus’ medium-term refinancing obligations, which include the potential payout to bondholders of  principal plus accrued interest on a 2013 $500m 3.375 per cent convertible bond if  put options are exercised in March 2011. The $150m convertible issue and high-yield transaction are indeed expected to finance a cash tender offer for the issue on September 11, which according to Barclays data was most recently priced at 93.3.

Of course, whether the new issue will be picked up enthusiastically is another matter. Barcap, for one, has warned its small-size could be problematic for future liquidity and that there’s only so much the management can do in these difficult markets.

We, meanwhile, note the triple-headed capital raising on Wednesday was underwritten by no less than six banks, while the refiner’s market outlook became markedly less upbeat:

We expect the market outlook for the second half of 2009 to remain challenging for the European refining industry due to continued economic instability and reduced demand combined with refining capacity additions.

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