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Petrotrin owed US$783m from NP, US$462m from Unipet
Petrotrin is owed US$783m from National Petroleum, and US$462m from United Independent Petroleum Marketing Company Ltd (Unipet), credit rating agency Moody’s has said in its 2014 rating of the state-owned petroleum company. Petrotrin president Khalid Hassanali, up to press time, had not commented in response to a Guardian query.
Moody’s said: “In addition to weaker refining margins, Petrotin’s cash flow has been hampered by past due receivables from state-owned National Petroleum Marketing Company (NPMC), and to a lesser degree from privately-owned Unipet. Local sales to these entities account for roughly 20 per cent of Petrotrin’s volumes. The local product sale prices are determined monthly by the Government, but have generally been at market prices.
“However, Petrotrin has had to grant extended payment terms to NPMC and Unipet due to delays in the Government paying these companies a subsidy covering a portion of the fuel cost. The past due receivables balance, as of September 30, 2013, was US$783 million from NPMC and US$462 million from Unipet, nearly 90 per cent of which represents the subsidy.
“Petrotrin initially relied on short-term debt to fund these delays. However, over the past year, the company has been funding the delays through the delay of tax payments to the Government, which has helped neutralise the cash flow impact. The company remains in discussions with the Government regarding a permanent resolution of the past due subsidies and, in the interim, continues to defer tax payments owed to the Government. If the company faces diminished liquidity as a result of this issue, it could face negative pressure on its rating or outlook.”
With weaker refining margins and a heavy capital programme, Petrotrin’s financial leverage is expected to rise over the next two years above the company’s target leverage ratio, Moody’s said.
According to Investopedia, financial leverage can be defined as the degree to which a company uses fixed-income securities, such as debt and preferred equity. With a high degree of financial leverage comes high interest payments. As a result, the bottom-line earnings per share (EPS) is negatively affected by interest payments. As interest payments increase as a result of increased financial leverage, EPS is driven lower.
“The company targets leverage of 50 per cent net debt/capitalisation, unadjusted, as compared to 45 per cent at September 30, 2013, and rising to 53 per cent in fiscal 2014 and around 55 per cent in fiscal 2015. Cash flow-based leverage metrics are also expected to lower, with cash from operations/debt (as adjusted for operating leases) projected to decline to 21 per cent in fiscal 2014, from 23 per cent in fiscal 2013.
“However, overall, the increase in financial leverage over the next 12-18 months is not expected to be sufficient to pressure Petrotrin’s underlying baseline credit assessment and Baa3 rating,” Moody’s said. Petrotrin’s liquidity profile is supported by the benefits associated with its government ownership, high level of export revenues, and its targeted maintenance of minimum cash balances (US$100 million), Moody’s said.
Constraints on the company’s liquidity include cash flows that are subject to the volatility and cyclicality of commodity prices, which during periods of high prices can result in substantial working capital needs, lack of a committed revolving bank credit facility, and its considerable investment needs, the rating said. Petrotrin’s capital expenditures are expected to be US$654 million in fiscal 2014, Moody’s said.
At Petrotrin, Moody’s said working capital needs have been primarily financed through the use of short-term uncommitted credit facilities with both local and foreign institutions, many of which have been providing credit to Petrotrin for over 20 years. Petrotrin’s cash balances (US$347 million at September 30, 2013) are held in both local currency and US dollars.
The company has a manageable long-term debt amortisation schedule (US$63 million per year through fiscal 2018). Petrotrin is not subject to financial maintenance covenants in its debt agreements, Moody’s said.
Sufficient liquidity profile
Moody’s gave Petrotrin a Baa3 rating, one notch above non-investment grade or “junk,” but said the company is stable. “The stable rating outlook assumes reasonable operating performance and maintenance of a sufficient liquidity profile,” Moody’s said.
Specifying what could improve Petrotrin’s rating, Moody’s said: “The successful completion of the company’s ULSD project and growth in its oil production, in tandem with materially reduced financial leverage (debt/capitalisation sustained at less than 40 per cent) could be positive for the baseline credit assessment and Baa3 ratings.”
On what could bring the rating down, Moody’s said that if Petrotrin experiences protracted refinery downtime or weak liquidity, its baseline credit assessment and Baa3 ratings could come under pressure. In addition, the Baa3 ratings could be downgraded as a result of a decreased likelihood that the Government would provide extraordinary support to Petrotrin or as a result of a downgrade of the Government’s Baa1 rating.
Moody’s said it primarily analysed Petrotrin’s baseline credit assessment within a peer group of independent refining and marketing companies, as this segment involves most of the company’s capital employed.