Sector: Energy
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Fundamental View
AS OF 26 Mar 2024Petronas’ FY23 credit metrics remained resilient even as EBITDA fell as we had expected.
We expect credit metrics to improve slightly from hereon due to expectations of slightly stronger upstream price realizations that could offset growth slowdown concerns. We expect Petronas to maintain its net cash position.
We take comfort in Petronas’ strong support from the Government of Malaysia, given it is strategically vested with Malaysia’s entire oil & gas resources and provides a substantial source of government income.
Sizable O&G and renewable capex and high dividend payouts could restrain improvements in Petronas’ credit metrics and free cash flows.
Business Description
AS OF 26 Mar 2024- Petronas is an integrated oil and gas company, wholly owned and controlled by the Government of Malaysia.
- Its activities span the entire up/mid/downstream value chain both domestically and internationally. Key products and services provided include the sale and marketing of petroleum products, crude oil and condensates, LNG, natural and processed gas, petrochemicals, shipping services, property development and automotive engineering.
- Petronas carries out its exploration, development and production activities via production sharing contracts (“PSCs”), mostly with international O&G companies and Petronas' wholly-owned subsidiaries.
- Its Downstream segment is aimed at refining, supplying, trading, manufacturing and marketing of crude oil, petroleum products, and petrochemical products. Its key projects and factories include Pengerang Integrated Complex (PIC), Sabah Ammonia Urea in Sabah, and Integrated Aroma Ingredients Complex in Gebeng, Kuantan.
- Its Gas and New Energy division was set up in FY19 and groups all of Petronas' LNG, gas and renewable revenues into a single segment. Activities within this division include production of LNG, processing and transportation of gas and solar power production.
- Its 6 listed subsidiaries include MISC Berhad (57.56%), KLCC Property (75.46%), Petronas Chemicals Group Berhad (64.35%), Petronas Gas Berhad (51%), Petronas Dagangan Berhad (63.94%), and Bintulu Port Holdings Berhad (28.52%).
Risk & Catalysts
AS OF 26 Mar 2024Broad growth slowdown concerns could hamper sales of Petronas’ Downstream (petroleum products) and Gas & New Energy (LNG and natural gas) segments.
Prolonged periods of low crude oil prices could harm upstream O&G EBITDA (which typically contributes 50%-70% of total profit after tax), albeit mitigated partly by stronger downstream O&G EBITDA.
Sizable capex on domestic O&G and renewable energy ventures could restrain improvements in Petronas’ credit metrics and free cash flows.
Petronas is regularly required to pay dividends to the Government of Malaysia, which may weigh on its cash flows.
Key Metrics
AS OF 26 Mar 2024MYR mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 13.5% | 18.8% | 21.1% | 18.4% | 18.2% |
Net Debt to Book Cap | n/m | n/m | n/m | n/m | n/m |
Debt/Total Equity | 15.7% | 23.2% | 26.7% | 22.6% | 22.2% |
Debt/Total Assets | 11.0% | 15.4% | 17.0% | 14.7% | 14.4% |
Gross Leverage | 0.7x | 1.4x | 1.1x | 0.6x | 0.8x |
Net Leverage | n/m | n/m | n/m | n/m | n/m |
Interest Coverage | 27.5x | 15.0x | 20.9x | 33.9x | 24.9x |
EBITDA Margin | 42.7% | 34.7% | 45.2% | 50.2% | 44.8% |
CreditSights View
AS OF 26 Mar 2024We have a Market perform recommendation on Petronas. Its shorter-dated and longer-dated bonds trade 15-26 bp and 28-43 bp tighter respectively than Pertamina’s bonds. We see this as fair given Petronas’ larger EBITDA, stronger net leverage and more transparent financial reporting that negates Indonesia’s relatively stronger FY24E GDP growth. Petronas’ credit profile stood resilient even amid poorer O&G price realizations through FY23 and maintained its net cash position. We expect Petronas to continue doing so over the next few quarters, aided by resilient domestic demand and slightly stronger price realizations. We also like its strong state support by the Government of Malaysia. However, sizable capex and high dividends could restrain free cash flow improvements.
Recommendation Reviewed: March 26, 2024
Recommendation Changed: September 07, 2020
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Fundamental View
AS OF 22 Mar 2024KEPCO is the sole integrated electricity utility company and a quasi-sovereign credit in Korea. Its credit profile is underpinned by the extremely high level of government support due to its critical policy role in ensuring the nation’s stable power supply.
KEPCO’s operating and net losses narrowed in FY23 thanks to electricity tariff hikes alongside lower fuel costs and its EBITDA turned around.
Its total debt/EBITDA and net debt/EBITDA was elevated at 18.2x/17.7x as of YE23 due to high debt burdens, and we expect its leverage metrics to improve from FY23 but remain at 7-9x due to large capex planned in FY24 and FY25 to develop its nuclear, LNG and renewable capacities.
Business Description
AS OF 22 Mar 2024- KEPCO is a quasi-sovereign credit and the sole integrated electric utilities company in Korea. The company was founded in 1898, 51% majority owned and controlled by the Korean government and Korean Development Bank, and listed on the Korea Stock Exchange/NYSE in 1989/1994.
- KEPCO is the sole provider of electricity transmission & distribution infrastructure and services, and controls ~60% of the nation's installed generation capacity and ~70% of power generation through its six wholly owned gencos: Korea Hydro & Nuclear Power (KHNP), Korea South-East Power (KOEN), Korea Western Power (KOWEPO), Korea East-West Power (EWP), Korea Midland Power (KOMIPO), and Korea Southern Power (KOSPO). In addition, KHNP is the sole nuclear power generation company in Korea. In FY23, KEPCO purchase ~65% of wholesale power from its genco subsidiaries and ~30% from independent power plants. On a consolidated basis, electricity transmission & distribution accounts for over 95% of KEPCO's annual revenues.
- KEPCO is a key implementation entity to carry out the Korean government's energy transition plan responding to climate change. KEPCO plans to fully stop coal generation by 2050. In order to achieve that, KEPCO plans to reduce its coal generation capacity to 23 GW in FY30 (FY23: 32.6 GW), and grow its renewable capacity to 37 GW in FY30 (FY23: 6.6 GW).
Risk & Catalysts
AS OF 22 Mar 2024Key risks to KEPCO’s standalone credit profile include: 1) higher-than-expected fuel costs due to continued increase of international prices of coal, natural gas and oil as well as a significant depreciation of the KRW against the $; (2) inability to pass through high fuel costs due to insufficient tariff adjustment; and (3) higher-than-expected capex and investments related to Korea’s green transition.
However, we do not foresee these risks to materially impair KEPCO’s ability to access funding, credit rating and overall credit profile as we expect KEPCO to continue receiving an extremely high level of support from the Korean government.
KEPCO’s exposure to nuclear power operations and coal-fired power generation may post ESG concerns for investors with an ESG mandate. But this risk exposure is partially alleviated by the company’s gradual shift towards renewable energy.
Key Metrics
AS OF 22 Mar 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 55.2% | 55.3% | 60.1% | 76.9% | 80.5% |
Net Debt to Book Cap | 54.0% | 54.1% | 58.7% | 75.3% | 78.4% |
Debt/Total Equity | 1.2x | 1.2x | 1.5x | 3.3x | 4.1x |
Debt/Total Assets | 42.9% | 43.0% | 46.7% | 59.6% | 64.3% |
Gross Leverage | 8.7x | 5.6x | 16.5x | -6.9x | 18.2x |
Net Leverage | 8.5x | 5.5x | 16.1x | -6.8x | 17.7x |
Interest Coverage | 4.8x | 7.8x | 3.1x | -7.2x | 1.9x |
EBITDA Margin | 16.5% | 26.5% | 9.8% | (28.3%) | 9.6% |
CreditSights View
AS OF 22 Mar 2024KEPCO is the sole electricity distributor and transmitter in South Korea, undertaking irreplaceable policy role. Its credit profile is underpinned by excellent government support thanks to its strategical role. KEPCO enjoys strong access to the onshore and offshore funding channels, mitigating its elevated leverage and insufficient cash coverage for short-term debt. KEPCO is in the process of implementing a financial improvement plan and aim to restore its financial soundness by 2027. Its $ bonds provide attractive yield pick-ups compared to lower-rated Chinese SOEs and BBB-rated low beta Korean corporates, in our view.
Recommendation Reviewed: March 22, 2024
Recommendation Changed: July 24, 2023
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Fundamental View
AS OF 11 Mar 2024PLN enjoys extremely strong ties with the Government of Indonesia (GoI) given its critical policy role of electrifying the nation.
We see a modestly poorer FY24 credit outlook as resilient domestic power demand, flattish power tariffs and insulation from input cost volatility are offset by sizable capex for coal and renewable capacity additions.
Presidential candidate Prabowo’s plans to tamp down on PLN’s monopoly could induce longer-term regulatory uncertainties.
Business Description
AS OF 11 Mar 2024- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 11 Mar 2024The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during the general elections period or other major events (e.g. COVID-19 pandemic).
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metrics
AS OF 11 Mar 2024IDR bn | FY20 | FY21 | FY22 | 1H22 | 1H23 |
---|---|---|---|---|---|
Debt to Book Cap | 32.2% | 29.7% | 28.9% | 29.1% | 26.9% |
Net Debt to Book Cap | 28.2% | 26.9% | 25.2% | 27.1% | 24.6% |
Debt/Total Equity | 47.4% | 42.2% | 40.7% | 41.1% | 36.7% |
Debt/Total Assets | 28.1% | 25.7% | 24.6% | 25.1% | 22.6% |
Gross Leverage | 5.5x | 5.0x | 4.2x | 4.3x | 4.0x |
Net Leverage | 4.8x | 4.6x | 3.7x | 4.0x | 3.6x |
Interest Coverage | 2.5x | 3.2x | 4.3x | 4.3x | 3.9x |
EBITDA Margin | 29.0% | 28.0% | 30.1% | 36.9% | 33.4% |
CreditSights View
AS OF 11 Mar 2024We have an Underperform recommendation on PLN. Its shorter-dated and longer-dated bonds trade only 18-25 bp and 14-30 bp wider than Pertamina’s similar maturity bonds respectively. We see a fair differential of 50-60 bp wider given PLN’s weaker net leverage, smaller EBITDA, higher coal-related ESG risks, poorer FY24 credit outlook, and potential longer-term unfavorable regulatory changes that could be implemented by Indonesia’s new Presidential candidate. We remain comfortable with its resilient credit profile aided by healthy domestic power demand amid flattish power tariffs, and good insulation from thermal coal cost volatility (given PLN has access to domestic coal at a maximum price of $70/ton). Capex for coal and renewable capacity additions could strain FCF and credit metrics.
Recommendation Reviewed: March 11, 2024
Recommendation Changed: December 13, 2023
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Fundamental View
AS OF 12 Dec 2023Pertamina enjoys very strong linkages with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress.
Slightly higher YoY FY24E Brent crude prices could lift upstream margins and overall EBITDA (given the upstream business accounts for >80% of consolidated EBITDA).
Although leverage typically remains low, Pertamina incurs large capex spending that could pressure its free cash flow generation.
High persisting dividend outflows could restrain free cash flow improvements.
Business Description
AS OF 12 Dec 2023- Pertamina is involved in a broad range of upstream and downstream oil, gas, geothermal and petrochemical operations.
- In the upstream sector, it engages in the exploration, development and production and supply of crude oil, natural gas and geothermal energy.
- As for the downstream sector, the company carries out refining, marketing and distribution of oil, gas, fuel products and petrochemical and other non-fuel products.
- As of 31 December 2022, its total proved oil reserves stood at ~1,289 mmbbl (mn barrels of oil) and gas reserves stood at ~817 mmboe (mn barrels of oil equivalent). Its average daily oil and gas production was ~967,000 boe per day in FY22. The company owns and operates 6 refineries in Indonesia.
- Under the Public Service Obligation (PSO) mandate, Pertamina is responsible for providing certain grades of motor gasoline, automotive diesel oil, kerosene and LPG at subsidized prices. The subsidized retail price is often times lower than the cost of production, creating a shortfall, for which it receives reimbursements from the GoI.
Risk & Catalysts
AS OF 12 Dec 2023Pertamina’s profitability is materially affected by volatility in oil & gas prices. Prolonged periods of low oil prices could hurt upstream earnings that form the bulk of overall EBITDA (>80%).
As retail prices of certain fuel products are regulated, realized prices may be below its cost of sales.
Pertamina has to initially absorb the shortfall between the regulated retail price and the cost of producing and distributing certain fuel products. If the price of crude oil exceeds the price ceiling set by the GoI, the company may receive insufficient subsidy reimbursements.
Capex typically remains elevated and which pressurizes its free cash flow generation.
Key Metrics
AS OF 12 Dec 2023$ mn | FY18 | FY19 | FY20 | FY21 | FY22 |
---|---|---|---|---|---|
Debt to Book Cap | 40.0% | 36.2% | 38.5% | 41.2% | 42.1% |
Net Debt to Book Cap | 21.5% | 22.4% | 18.9% | 21.9% | 12.5% |
Debt/Total Equity | 66.6% | 56.8% | 62.5% | 70.0% | 72.7% |
Debt/Total Assets | 30.5% | 26.4% | 28.3% | 29.9% | 30.8% |
Gross Leverage | 2.1x | 2.2x | 2.4x | 2.5x | 1.9x |
Net Leverage | 1.2x | 1.3x | 1.2x | 1.3x | 0.6x |
Interest Coverage | 10.3x | 8.1x | 7.8x | 8.7x | 11.2x |
EBITDA Margin | 15.9% | 14.9% | 19.9% | 16.0% | 16.7% |
CreditSights View
AS OF 09 Jan 2024We have a Market perform recommendation on Pertamina. We think Pertamina should trade 50-60 bp tighter than Indonesian SOE PLN as Pertamina’s lower net leverage and less material ESG concerns (PLN is still largely a thermal coal power producer) outweigh a weaker FY23 upstream oil price outlook. We remain comfortable with Pertamina’s credit profile aided by its strong government backing and expectations of slightly higher YoY FY24 average Brent crude prices that could support upstream margins (FY22 credit metrics: 1.9x/0.6x). Capex remains elevated amid a ramp up in energy transition goals.
Recommendation Reviewed: January 09, 2024
Recommendation Changed: May 16, 2023
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Fundamental View
AS OF 05 Dec 2023We see a mildly better FY23 credit outlook owing to resilient fuel demand aided by Petron’s dominant market share in 2 markets, and relatively strong insulation from crude oil input cost volatility.
About two-third of its total revenues are derived from the Philippines and are indexed to Dubai crude prices, which allows for smooth cost pass-throughs.
Despite historically low capex, free cash flows are typically negative due to inventory fluctuations.
Business Description
AS OF 05 Dec 2023- Petron is the largest oil refining and retailing company in the Philippines, and the third largest player in Malaysia. It maintains a 24% market share in the Philippines (followed by Shell and Caltex) and a 20% market share in Malaysia (largest being Petronas), based on total fuel sales volumes.
- Petron has a total refining capacity of 268k barrels/day (bpd) and accounts for about 30% of the Philippines' fuel needs. Its petroleum refining facilities include the Limay Refinery in Bataan, Philippines (capacity of 180k bpd; 67% of total) and the Port Dickson Refinery in Negeri Sembilan, Malaysia (capacity of 88k bpd; remaining 33% of total).
- Petron's refineries process crude oil into a full range of petroleum products including gasoline, diesel, LPG, jet fuel, kerosene and petrochemicals.
- It further markets and retails these fuel products through its fuel service stations located across the Philippines (2,400 outlets) and Malaysia (700 outlets).
- Petron sources its crude oil supplies from third-party suppliers, namely Saudi Aramco, Kuwait Petroleum Corporation and Exxon Mobil, which are bought on the basis of term contracts and in the spot market.
- Petron mainly supplies its petroleum and fuel products to customers in Malaysia and the Philippines (~95% of annual revenue).
- Petron is 68% owned by San Miguel Corporation (SMC), one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets. SMC's CEO, Mr. Ramon Ang, is also Petron's CEO.
Risk & Catalysts
AS OF 05 Dec 2023Petron holds 55 days of inventory, which is on the high side relative to industry standards. This exposes the company to inventory losses attributable to potential short-term swings in crude oil prices.
Prices of fuel products are adjusted on a weekly basis in the Philippines, according to international crude oil prices.
Petron operates in low-margin business (EBITDA margins ~5%) and maintains elevated credit metrics.
Petron is highly dependent on its Limay petroleum refining complex that makes up two-thirds of its total refining capacity (67%). Any events that disrupt the refinery’s operations could adversely affect Petron’s total revenues.
Key Metrics
AS OF 05 Dec 2023PHP bn | FY20 | FY21 | FY22 | 3Q22 | 3Q23 |
---|---|---|---|---|---|
Debt to Book Cap | 74.3% | 72.3% | 74.0% | 73.8% | 74.3% |
Net Debt to Book Cap | 66.3% | 63.3% | 65.5% | 64.7% | 67.0% |
Debt/Total Equity | 289.4% | 261.6% | 284.2% | 281.9% | 288.7% |
Debt/Total Assets | 71.3% | 71.2% | 70.2% | 71.1% | 64.4% |
Gross Leverage | 65.4x | 11.2x | 10.9x | 11.1x | 7.4x |
Net Leverage | 58.3x | 9.8x | 9.7x | 9.8x | 6.7x |
Interest Coverage | 0.3x | 2.5x | 2.2x | 2.5x | 2.2x |
EBITDA Margin | 1.3% | 5.9% | 3.4% | 1.4% | 6.1% |
CreditSights View
AS OF 13 Dec 2023We maintain our Market perform recommendation on Petron. Its c.Apr-2026 perp trades 50 bp tighter than SMC c.Jul-2025 perp, that rightly reflects Petron’s Opco structure vs. SMC’s Holdco, its cost pass-through mechanisms, and low capex which more than offset SMC’s diversified businesses and its slightly better net leverage. Overall, we see a stable/mildly improving credit outlook for Petron amid resilient fuel demand and insulation from crude oil input cost volatility in the Philippines. Its leverage metrics remain elevated, negated partly by its relatively low capex. The recent repayment of the $478 mn c.Jul-2023 perp aids its track record.
Recommendation Reviewed: December 13, 2023
Recommendation Changed: January 26, 2022
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Fundamental View
AS OF 05 Dec 2023We remain highly concerned about refinancing/extension risk for SMC GP’s $2.5 bn of perps that have their first call dates in 2025-2026. We are more comfortable with its $783 mn c.Apr-2024 perp given strong near-term parental funding support.
Leverage metrics failed to improve in 1H23 despite stronger EBITDA and lower thermal coal input costs.
While SMC GP improved its cost passthrough contractual mix in 2023 (portion of contracts without cost passthrough mechanisms lowered from ~65% to ~45%-50%), the company still remains exposed to high thermal coal input costs.
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Business Description
AS OF 05 Dec 2023- SMC GP is a leading power generation and distribution company in the Philippines. As at 31 December 2021, its total generation capacity stood at 4.7 GW, accounting for ~20% of the national grid.
- The bulk of its revenues is derived from power generation (~82%), with the remainder from electricity distribution and retailing (~18%).
- It operates 7 power generating plants across diversified energy sources, comprising coal (~62%), natural gas (~25%), hydro (~12%) and battery energy storage (~1%).
- Through long-term power supply agreements and retail supply contracts, SMC GP either sells electricity directly to customers (including large Philippines power distribution company Manila Electric Company, distribution utilities and other industrial customers), or through the Philippine Wholesale Electricity Spot Market.
- SMC GP acts as the Independent Power Producer Administrator (IPPA) for three power plants (~54% of total capacity), where it has the right to sell electricity generated by the IPPs without having to bear large upfront capital expenditures for plant construction and maintenance.
- SMC GP also distributes and retails electricity services through its wholly-owned subsidiary Albay Power and Energy, which distributes power in the province of Albay, Luzon.
- SMC GP is a wholly-owned unlisted subsidiary of San Miguel Corporation, one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets.
Risk & Catalysts
AS OF 05 Dec 2023We remain highly concerned about non-call risk for SMC GP’s $2.5 bn of perps that have their first call dates in 2025 and 2026, amid tight funding market conditions, unsustainable parental support, and SMC GP’s frail credit profile.
A moderate portion of SMC GP’s off-take contracts (~45-50%) do not contain cost pass-through mechanisms. This exposes the company to a rise in thermal coal input costs that could squeeze its EBITDA margins.
We are watchful of a failure to extend its 480 MW and 330 MW emergency power supply agreements (EPSAs) by mid-2024.
SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
Over 88% of SMC GP’s installed capacity is thermal coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Key Metrics
AS OF 05 Dec 2023PHP bn | FY20 | FY21 | FY22 | 3Q22 | 3Q23 |
---|---|---|---|---|---|
Debt to Book Cap | 68.8% | 66.7% | 69.2% | 70.5% | 62.5% |
Net Debt to Book Cap | 53.6% | 57.7% | 66.4% | 65.1% | 59.4% |
Debt/Total Equity | 220.7% | 199.9% | 224.6% | 239.3% | 166.6% |
Debt/Total Assets | 81.9% | 79.2% | 79.0% | 80.1% | 75.8% |
Gross Leverage | 10.5x | 10.5x | 19.4x | 15.1x | 15.2x |
Net Leverage | 8.2x | 9.1x | 18.6x | 14.0x | 14.4x |
Interest Coverage | 2.4x | 2.5x | 1.4x | 2.1x | 1.9x |
EBITDA Margin | 41.3% | 35.9% | 13.2% | 5.8% | 28.8% |
CreditSights View
AS OF 19 Mar 2024We maintain our Underperform recommendation on SMC GP, but like its c.2024 and both the c.2025 perps. While we acknowledge SMC GP’s healthier FY24 credit outlook aided by an improved cost pass-through and contribution from new capacities, we expect its free cash flows to remain firmly negative amid still-high capex. Our funding estimates suggest SMC’s funding support combined with our expectation of a $400-500 mn perp issuance each in 2024 and 2025 could cover SMC GP’s perps up to end-2025.. In turn, we are concerned about non-call/extension risks on the c.2026 $ perps. Cash inflow from asset transactions, successful $ perp issuance of reasonable size at a <10% interest, a better-than-expected FY24 results and more funding support from SMC could act as positive catalysts for the credit.
Recommendation Reviewed: March 19, 2024
Recommendation Changed: February 06, 2023
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Fundamental View
AS OF 31 Oct 2023We expect the credit profile of Sinopec, which is one of the three Chinese national oil companies (NOCs) to continue to be underpinned by its strategic role in China’s energy security and the resulting strong government support.
We expect Sinopec’s standalone credit profile to remained supported in the remaining of FY23, thanks to resilient refined oil demand, improving picture for the chemical segment, and inventory gains resulted from elevated crude prices, which shall offset the increase in input crude cost used for refining and weaker cost pass-through since prices remain above $80/bbl.
To note, we use the financials of HKEx listed Sinopec Corp (386.HK) as a proxy for the credit profile of its parent, which is also the obliged of the outstanding $ bonds (BBG: SINOPE).
Business Description
AS OF 31 Oct 2023- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically. In 9M23, 31.1% of Sinopec Corp' revenues came from marketing and distribution (i.e. retail and direct sales of refined oil), 26.5% from refining, 8.7% from chemicals and 5.0% from E&P. Corporate and others segment accounted for the remaining 28.7% of sales revenue, consisting of import and export business, R&D and managerial activities.
- The group has historically relied on O&G imports as the main feedstock into its core refining business. Depending on the prices of their feedstock and product mix, this can arise in differing profitability and refining margins for the group. Sinopec Group's refining processes and marketing network are more essential to smooth its profitability and refining margins.
- In 9M23, Sinopec's total oil and gas output was 376 mn barrels of oil equivalent (mmboe), up 3.6% YoY. This included 188 mmbbls of domestically produced crude oil (+0.1% YoY) and 22 mmbbls of overseas crude oil (-1.8% YoY), as well as 993 bcf of natural gas (+8.7% YoY), mostly produced in China. The average realized price of its crude oil and natural gas was $75.7/bbl and $7.1/thousand cubic feet in 9M23, -19.7% YoY and -5.8% YoY respectively.
Risk & Catalysts
AS OF 07 Sep 2023Risks: Lower-than-expected domestic sales of refined oil and chemical products due to a severe economic downturn, higher-than-expected crude oil and gas feedstock costs, elevated inventory losses due to tumbling oil & gas prices, and large capex overrun result in a weaker standalone credit profile. However, we expect the strong government support to offset these downside risks. US sanction related headline risks due to US-China tension and other geopolitical risks.
Catalysts: inflow into China $ bonds as a result of improving China macro outlook and US-China relationship.
Key Metrics
AS OF 31 Oct 2023RMB bn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
---|---|---|---|---|---|
Total Debt/Capitalization | 27.8% | 25.3% | 25.6% | 27.5% | 33.9% |
Net Debt/Capitalization | 17.3% | 9.4% | 7.6% | 16.3% | 21.3% |
Total Debt/Total Equity | 38.6% | 33.8% | 34.5% | 38.0% | 51.2% |
Total Debt/Total Assets | 19.2% | 17.2% | 16.7% | 18.3% | 23.4% |
Total Debt/EBITDA | 1.6x | 1.5x | 1.2x | 1.5x | 2.1x |
Net Debt/EBITDA | 1.0x | 0.6x | 0.4x | 0.9x | 1.3x |
EBITDA/Gross Interest | 12.9x | 16.8x | 20.1x | 16.1x | 13.1x |
EBITDA Margin | 7.3% | 9.5% | 9.4% | 7.0% | 7.0% |
CreditSights View
AS OF 07 Sep 2023We affirm our Market perform recommendation on Sinopec (A1/A+/A+). A-rated Chinese state-owned enterprises (SOEs), including Sinopec are trading tight due to a lack of new supply and as investors fly to quality amid macro uncertainties in China. We continue to prefer AA-rated Korean SOEs (e.g., KEPCO & its subsidiary, and Korea Gas) and higher-beta Chinese SOEs (e.g. ChemChina) for yield pickup.
Recommendation Reviewed: September 07, 2023
Recommendation Changed: May 03, 2021
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Fundamental View
AS OF 25 Sep 2023KORGAS is Korea’s sole integrated gas utility company and a quasi-sovereign credit in Korea with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas.
We think its credit profile is underpinned by its dominant market position in Korea’s natural gas and hydrogen utility market, and the strong support from the Korean government. This partly mitigates its delayed and incomplete pass-through of gas procurement costs when natural gas price surges, such as in FY22.
We expect its credit profile to improve in FY23 supported by lower natural gas procurement costs and the gradual implementation of delayed gas tariff hikes, which would partially mitigate concerns over its elevated capex.
Business Description
AS OF 25 Sep 2023- KORGAS is 54.6% directly/indirectly owned by the Korean Government (Central Government 26.2%, KEPCO 20.5%, Local Government 7.9%). It is Korea's sole integrated gas utility company with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas. It is crucial to Korea's green transition plan to increase LNG generation by 56% by 2036 from 2022. In addition, KORGAS was licensed as Korea's sole hydrogen distribution agency in 2020.
- KORGAS is one of the largest LNG importer in the world and sells imported natural gas to domestic companies in South Korea. Its total production capacity across its five major production bases (Pyeongtaek, Incheon, Tongyeong, Samcheok and Jeju) was 15,400 tons/hour as of 30 June 2023. KORGAS sold a total of 38.4 mn metric tons of natural gas in 2022 and 18.5 mn metric tons in 1H23 (-9.7% YoY).
- The Korea natural gas industry is divided into wholesale and retail segments. KORGAS is the only wholesaler in Korea, and the regional city gas companies are in charge of supplying natural gas to retail consumers through regional retail pipelines. KORGAS sold 52% of its gas sales to domestic LNG-fired power generation companies (gencos), including the genco subsidiaries of KEPCO and independent power producers (IPPs), and the remaining 48% to city gas companies and heating companies in 1H23.
Risk & Catalysts
AS OF 25 Sep 2023Key risks to KORGAS’ standalone credit profile include: (1) Significant depreciation of the KRW against the $ ; (2) Delayed and/or smaller-than-expected retail tariffs hikes; and (3) higher-than-expected capex and investments related to Korea’s green transition.
However, we do not foresee these risks to materially impair KORGAS’ ability to access funding, credit rating and overall credit profile as we expect KORGAS to remain as the sole integrated gas utility company and continue to receive extremely strong financial support from the Korean government.
Key Metrics
AS OF 25 Sep 2023KRW bn | FY19 | FY20 | FY21 | FY22 | LTM 1H23 |
---|---|---|---|---|---|
Debt to Book Cap | 76.6% | 75.7% | 75.8% | 81.3% | 79.7% |
Net Debt to Book Cap | 75.6% | 74.6% | 74.2% | 79.8% | 77.6% |
Debt/Equity | 327.2% | 312.4% | 313.3% | 434.3% | 393.2% |
Gross Leverage | 8.7x | 9.5x | 9.6x | 10.7x | 10.7x |
Net Leverage | 8.6x | 9.4x | 9.4x | 10.5x | 10.5x |
Interest Coverage | 3.7x | 3.4x | 4.6x | 4.7x | 2.1x |
EBITDA Margin | 12.3% | 12.2% | 10.8% | 8.1% | 7.1% |
CreditSights View
AS OF 25 Sep 2023We initiated coverage on KORGAS with an O/P recommendation. We expect its credit profile to improve in FY23 on the back of lower natural gas procurement costs and a gradual implementation of the delayed tariff hike. As the sole integrated natural gas utility company in South Korea, we expect the KORGAS to continue to enjoy high level of government support, which protects its dominant market position, translates to excellent access to funding and mitigates its high leverage. We view KOGAS as attractive compared to lower rated Chinese SOEs, BBB-rated low beta Korean corporates and other Korean quasi-sovereigns. We recommend KORGAS to investors looking for 5-6% safe carry in the Asia credit space. We prefer short-end (<3Y) of KORGAS on total return basis and KORGAS 26s for spread investors.
Recommendation Reviewed: September 25, 2023
Recommendation Changed: June 27, 2023