First there was Flying J which filed for Chapter 11 bankruptcy in December, 2008, then there was Lyondell Basell, which filed for Chapter 11 bankruptcy in January, 2009.
And now, the pressure of challenging distillate margins and low demand appears ready to take a toll on some other very prominent independent refiners.
Here’s the latest from Standard & Poor’s on the ratings outlook for independent Swiss refiner Petroplus (our emphasis):
STOCKHOLM (Standard & Poor’s) May 8, 2009– Standard & Poor’s Ratings Services said today that it had revised its outlook on Switzerland-based oil refiner Petroplus Holdings AG to negative from stable due to worsened industry conditions, notably a strong contraction in middle distillate crack spreads, and a potential severe weakening of the company’s credit metrics in 2009.
At the same time, the ‘BB’ long-term corporate credit ratings were affirmed. “The outlook revision reflects the possibility of a greater-than-previously-expected deterioration in Petroplus’ credit metrics as a result of increasingly challenging conditions in the refining sector,” said Standard & Poor’s credit analyst Per Karlsson.
“We believe that European refiners, such as Petroplus, with high levels of middle distillate output, are particularly affected. We have revised downward our expectations for demand for middle distillate and consequently lowered our expectations for crack spreads,” Mr. Karlsson added.
In addition, Petroplus’ working capital outflow over the past six months has been higher than previously expected, while its cash has been reduced by an increase in short-term debt. Petroplus’ first quarter operating performance was reasonable, with reported replacement-cost EBITDA of $148 million (reported EBITDA of $90 million), but we expect 2009 to be challenging in light of a fall in middle distillate crack spreads since March.
Market conditions for European refineries with a focus on diesel and middle distillates (47% of Petroplus’ output) have deteriorated sharply since March 2009 as a result of a drop in middle distillate demand, itself a consequence of a sharp fall in European GDP. Diesel crack spreads have weakened by more than we previously expected, although gasoline crack spreads have held up somewhat better.
The ultra-low sulfur diesel crack spread, for instance, has fallen to an average of $9.83 per barrel so far in the second quarter of 2009, compared with levels of about $30 per barrel in 2008. 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 short, unless the massive distillate overhang currently present in the market diminishes, prospects for independent refiners are unlikely to improve any time soon. Not helping matters either will be the increased supply coming from Reliance’s brand-new 580,000 barrel-a-day Jamnagar refinery in India too.
The irony is, if too many independents fail, it could lead to a not insubstantial shortage of gasoline in the market, a factor that could quite conceivably see gasoline prices shoot up within the year.
Related links:
Distillate hangover - FT Alphaville
Tanked – FT Alphaville
Crude inventories still a problem – FT Alphaville
The crude inventory problem, pictorial edition – FT Alphaville