Macroeconomic permutations and regional stresses are likely to constrain the earnings of Asian refining and marketing (R&M) companies over the next 12 months, quite in contrast to an uptick in fortunes for the downstream segment globally, if one rating agency is to be believed.
According to Moody’s, Asian refiners – many of whom dwarf their Western counterparts in terms of capacity – will likely see their earnings fall in 2019, as higher regional crude prices drive up feedstock cost, and retail fuel price regulation in some countries pressures marketing profits.
Rachel Chua, Assistant Vice President and Analyst at Moody’s, said: “Such regional headwinds will drive a 3% to 4% decline in aggregated EBITDA [earnings before interest, taxes, depreciation, and amortization] through 2019. The EBITDA decline would have been even higher if not for continuing modest demand growth in Asia.”
Oil refinery on the outskirts of Beijing, China: Rating agency Moody’s expects a 2019 contraction in Asian refiners’ earnings (Photo: Kevin Lee/Bloomberg)BLOOMBERG NEWS
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The falling EBITDA contrasts with Moody’s positive outlook for the global R&M sector reflecting projected earnings growth, helped by lower crude prices and strong distillate spreads in North America.
But higher feedstock costs will remain a drag on Asian refiners, with the price premium of regional Dubai crude over West Texas Intermediate crude widening to in excess of $8 per barrel in October 2018; the highest level since early 2015.
Moody’s expects that the benchmark Singapore complex refining margin will stay benign, at $5.5 per barrel over the next 12 months, largely in line with the year-to-date average. The agency’s projection also accounts for mounting Chinese petroleum exports into the Asian market, which are in direct competition with other export-oriented Asian refiners.
Nonetheless, the Singapore complex refining margin could benefit from some upside starting in the second half of 2019, as stricter global sulfur limits for shipping fuel from January 2020 will spark demand for diesel.
Additionally, the reintroduction of fuel subsidies will squeeze marketing margins. Specifically, oil marketing companies in India and Indonesia have been asked by their governments to sell petrol and diesel to consumers at subsidized prices, for which they will not receive any reimbursements.
However, fears over the reintroduction of subsidies have somewhat eased in the wake of the recent oil price slump.
Moody’s also said that the R&M companies’ large investments and high working capital levels will raise total borrowings. “Asian refiners will push ahead with large investment plans aimed at boosting profitability and improving resilience to volatility in refining margins.
“High capital spending and limited flexibility to scale back dividends will likely result in continued negative free cash flow generation for many rated refiners, which they will have to address with external borrowings.”
Finally, the agency also forecast that Asian refiners will increase their reliance on short-term debt, as working capital needs rise in tandem with crude prices. Nonetheless, Moody’s added that rated refiners should have access to credit facilities, given their strong relationships with banks.