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Fundamental View

AS OF 11 May 2023
  • While Petron’s credit metrics remain elevated, we see a stable FY23 credit outlook owing to moderating crude oil prices and resilient fuel demand aided by the company’s dominant market share in 2 markets.

  • Petron is fairly insulated against high crude oil input costs as about two-third of its total revenues are indexed to Dubai crude prices, which allows for cost pass-throughs in Philippines.

  • Liquidity remains tight, though we expect its stable fundamentals and strong SMC group reputation to facilitate debt rollover and refinancing.

  • We see low non-call risk for Petron’s $478 mn c.Jul-2023 perp given its punitive 250 bp coupon step-up, its desire to avoid reputational risk and contagion risk to other SMC perps, and that it can be covered by its unrestricted cash balance or be refinanced.

Business Description

AS OF 11 May 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 11 May 2023
  • Petron 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 11 May 2023
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CreditSights View

AS OF 11 May 2023

 We maintain our Market perform recommendation on Petron. Its c.Apr-2026 perp trades 15 bp wider than SMC GP c.Jan-2026 perp, that rightly reflects its slightly longer tenor. We think Petron is fundamentally stronger than SMC GP, as it enjoys cost pass-through mechanism, has modestly better leverage metrics and has manageable perps turning callable. We think it is SMC GP that has room to widen. Overall, we see a stable credit outlook for Petron amid resilient fuel demand and lower crude oil prices, and its cost pass-through mechanism in Philippines. Its leverage metrics remain elevated, negated partly by its relatively low capex. We see low non-call risk for its $478 mn c.Jul-2023 perp given Petron’s ability to tap its cash balance, refinance, and its desire to avoid reputational risk.

Recommendation Reviewed: May 11, 2023

Recommendation Changed: January 26, 2022

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