OREANDA-NEWS. Fitch Ratings (Thailand) Limited has affirmed IRPC Public Company Limited's (IRPC) National Long-Term Rating at 'A-(tha)', National Short-Term Rating at 'F2(tha)', and the senior unsecured class national rating at 'A-(tha)'. The Outlook remains Negative.

The Negative Outlook reflects the integrated oil refining and petrochemical company's weak credit metrics in 2014 due to weak cash flows and high capex. Its financial leverage is not expected to improve to levels appropriate for its standalone rating of 'BBB+(tha)' before 2016. IRPC's long-term ratings incorporate a one-notch uplift to take into account linkages with its single largest shareholder, PTT Public Company Limited (PTT; AAA(tha)/Stable). IRPC has received tangible financial support in the form of extended credit terms from PTT, which has helped its liquidity and overall credit profile.

KEY RATING DRIVERS

Extended Credit Terms: IRPC continues to receive support from PTT in the form of flexible credit terms on its crude purchases. IRPC expects extended credit terms on all crude purchases from PTT in 2015, in addition to the extensions received in 2013-2014. This should result in a reduction of its working-capital needs of about THB10bn in 2015, decreasing its debt requirements. We expect credit terms to gradually normalise as IRPC's operating cash flow generation improves.

Weak Operating Cash Flows: Fitch expects the company to have generated negative EBITDA in 2014 due to inventory losses as a result of the sharp drop in oil prices in late 2014. Without the inventory losses, IRPC's overall operatating performance and margins were fairly robust. Fitch expects IRPC's operating cash flows to improve in 2015-2018 because of enhancements to its assets from an on-going investment programme.

Large Planned Capex: IRPC's capex requirement is likely to remain elevated in 2015, but is expected to reduce sharply from 2016 onwards with the completion of major projects, such as the Upstream Project for Hygiene & Value Added Products (UHV Project) to raise yield for light and middle distillate products and add capacity for olefin products. Other projects aim to add capacity for higher-value propylene derivative products, reduce costs and improve margins.

Fully Integrated Producer: IRPC has a competitive advantage as a fully integrated oil refining and petrochemicals producer, and its expertise and long track record in downstream petrochemicals in Thailand. An increase in output of high value-added products following investments to expand its facilities is likely to improve its margins and reduce margin volatility. The higher margins and better asset utilisation are critical for the company to achieve an improved financial profile that would be comfortable for its rating in the next two years.

Linkages with PTT: IRPC's linkages with PTT are underscored by PTT's status as the single largest shareholder of IRPC with 39% ownership. In addition, IRPC falls within PTT's central treasury management framework, key management personnel from PTT are rotated among its group of companies, including to IRPC, and PTT extends IRPC flexible credit terms.

Highly Cyclical Business: IRPC's credit profile is tempered by its high vulnerability to oil prices, volatile refining margins and petrochemical prices, which can significantly affect its earnings and cash flow generation.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Feedstock costs in line with Fitch's global oil and gas price forecasts.
- Gross integrated margin (GIM) to improve in 2015-2018 driven by margin improvement from cost reduction programs, higher crude runs, and higher yields from high-value products as a result of the completion of UHV and propylene derivatives projects.
- A planned refinery shutdown in 2016.
- Capex to reduce significantly from 2016.
- PTT to provided extension of credit terms in 2015-2016; credit days to gradually reduce to normal level by 2018.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Weaker-than-expected operating cash flows, resulting in credit metrics not improving at the expected pace; a downgrade of the ratings may occur if the company fails to improve its FFO-adjusted net leverage below 4.25x (end-2013: 5.49x) and FFO fixed charge coverage to over 3.0x (end-2013: 3.30x) by end-2016 (on a projected basis).
- A weakening of linkages with PTT.

Positive: Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable at the current rating level include;
- Improvement of its FFO-adjusted net leverage below 4.25x and FFO fixed charge coverage to over 3.0x by end-2016 (on a projected basis).