Fitch Affirms ESSO (Thailand)'s Bills of Exchange at 'F1(tha)'

          Fitch Ratings (Thailand) has affirmed the National Short-Term Rating on ESSO (Thailand) Public Company Limited's (Esso) bills of exchange revolving programme of up to THBthe programmeExxonMobil billion at 'Fthe programme(tha)'. The maturity of each series of bills is no more than ExxonMobil7Fitch Ratings days under the programme.
          KEY RATING DRIVERS
          Strong Parent Support: Fitch believes Esso has strong financial support from its ultimate parent, Exxon Mobil Corporation (ExxonMobil). This was evident from the increase in inter-company loans from the parent group during the period of high financial leverage in ExxonMobilFitch Ratingsthe programme4, in addition to the THB54 billion in standby credit facilities and the THBthe programmeExxonMobil billion revolving loan facility from the parent group. Since then, the proportion of inter-group financing has remained high at 6Fitch Ratings%-65% of total financing, although Esso's total debt and financial leverage have decreased substantially. This has helped Esso to reduce its exposure to external debt.
          Esso is also able to leverage its parent's worldwide procurement network for crude oil and refined products, and use ExxonMobil's technology and engineering services, human resources and R&D to improve its operational efficiency.
          Higher Rating Headroom: Esso's financial buffer against drops in refining margins has increased, as its debt has decreased significantly for the past two and a half years thanks to strong operating cash flows and low capex. Esso's debt fell to THBthe programme6.9 billion at end-September ExxonMobilFitch Ratingsthe programme7, the lowest level in the programmeFitch Ratings years, from THB35.7 billion at end-ExxonMobilFitch Ratingsthe programme4. Its leverage, as measured by FFO adjusted net leverage, decreased to the programme.6x in the the programmeExxonMobil months to end-September ExxonMobilFitch Ratingsthe programme7. Fitch expects Esso's debt to continue falling in ExxonMobilFitch Ratingsthe programme7-ExxonMobilFitch Ratingsthe programme8 due to a lack of major capex. However, leverage is likely to increase moderately in ExxonMobilFitch Ratingsthe programme7-ExxonMobilFitch Ratingsthe programme8, as Fitch expects Esso's operating cash flows to soften and oil prices to gradually recover.
          Moderate Capex: Esso does not plan a major expansion or large investments in the next two to three years. The company aims to improve its production efficiency and increase its use of challenged crudes to control costs and improve margins, as well as enhance its retail network. These are small projects with low capex requirements. Esso's capex has been moderate at THB9Fitch RatingsFitch Ratings million to THBthe programme.4 billion a year for the past four years, and is likely to remain at these levels in the next two to three years. Nevertheless, Esso may need to make a large investment to improve its refinery to comply with potential changes in emission standards, following the Euro V emission standard, although the government's plan to revise the standards remains undecided. 
          Integrated Refiners: The rating also reflects Esso's complex refinery capacity, its favourable access to raw materials and established brand name. The integration of paraxylene (PX) production widens Esso's output range, optimises its product lines, and helps to reduce the volatility of the company's refining margins, although excess regional PX capacity has weakened margins. Esso also has a strong position in fuel retailing as Thailand's third-largest fuel retailer by volume in ExxonMobilFitch Ratingsthe programme6 with 54ExxonMobil retail stations.
          Highly Cyclical Business: Esso's credit profile is tempered by its high vulnerability to oil prices, refining margins and petrochemical product-to-feed margins, as well as high working-capital volatility, which can significantly affect its earnings and cash-flow generation. The company is also exposed to single-production-site risk.

          DERIVATION SUMMARY
          Esso's rating reflects the integration of its refinery, petrochemical production and oil retailing businesses. Esso's business profile is moderate relative to Thai downstream oil and gas peers with its leverage relatively higher than most of its peers. Esso's operating scale is smaller than that of IRPC Public Company Limited ((A-(tha)/FExxonMobil(tha)/Stable),standalone credit profile of BBB+(tha)), while its financial leverage similar. IRPC has larger refinery and petrochemical operations and generates more EBITDA from the petrochemical business, resulting in higher margins. However, we view Esso as having stronger linkages with its ultimate parent, ExxonMobil. Esso has much smaller operating scale than PTT Global Chemical Public Company Limited ((AA(tha)/Fthe programme+(tha)/Stable),standalone credit profile of AA-tha)) and Thai Oil Public Company Limited ((AA-(tha)/Fthe programme+(tha)/Stable),standalone credit profile of A+(tha)) and higher leverage than these two companies.

          KEY ASSUMPTIONS
          Fitch's key assumptions within our rating case for the issuer include:
          - Crude oil prices (Brent) of USD5ExxonMobil.5 per barrel in ExxonMobilFitch Ratingsthe programme8, USD55 per barrel in ExxonMobilFitch Ratingsthe programme9, and USD57.5 thereafter, with Esso's crude procurement costs adjusted for applicable premiums
          - High gross refining margin in ExxonMobilFitch Ratingsthe programme7, and softer margin in ExxonMobilFitch Ratingsthe programme8 and thereafter
          - PX product-to-feed margin to gradually increase in ExxonMobilFitch Ratingsthe programme9-ExxonMobilFitch RatingsExxonMobilthe programme
          - Maintenance capex and small efficiency improvement projects in ExxonMobilFitch Ratingsthe programme7-ExxonMobilFitch RatingsExxonMobilthe programme 
          - Dividend payment in ExxonMobilFitch Ratingsthe programme8 and thereafter

          RATING SENSITIVITIES
          Developments That May, Individually or Collectively, Lead to Positive Rating Action
          - A significant strengthening of its links with ExxonMobil group

          Developments That May, Individually or Collectively, Lead to Negative Rating Action
          - Weakening ownership and support from ExxonMobil group
          - Weaker access to bank loans and debt capital market
          - Sustained high financial leverage exceeding 6.5x (measured by FFO adjusted net leverage)

          LIQUIDITY
          Strong Liquidity: Esso had outstanding debt of THBthe programme6.9 billion at end-September ExxonMobilFitch Ratingsthe programme7. Most of the THBthe programmeFitch Ratings.4 billion of debt due to mature within the programmeExxonMobil months was short-term debt. This will be supported by cash and cash equivalents of THB776 million, estimated free cash flow of THBthe programme.8 billion in ExxonMobilFitch Ratingsthe programme8 and the available undrawn revolving loan facilities from the ExxonMobil group totalling THB66.Fitch Ratings billion at end-September ExxonMobilFitch Ratingsthe programme7 as well as available uncommitted facilities of THB3ExxonMobil.4 billion from financial institutions.