CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the existing ratings of CITGO Petroleum Corporation (CITGO) as follows:
--Issuer Default Rating (IDR) at 'B+';
--Senior Secured Credit Facility at 'BB+';
--Secured Term Loan at 'BB+';
--Fixed-Rate Industrial Revenue Bonds (IRBs) at 'BB+'.
Fitch has also revised the Rating Outlook on CITGO's IDR to Positive from Stable.
The main drivers of the revised Outlook include:
--Rapid improvements in the company's financial performance, prompted by a backdrop of improving global refining fundamentals;
--CITGO's access to heavily discounted WTI-linked crudes;
--The company's recent de-leveraging, which has reduced balance sheet debt to approximately $1.503 billion at the end of the first quarter versus $2.202 billion at year-end 2009;
--Completion of Ultra Low Sulfur Diesel (USLD) construction at Lemont and Corpus Christi, which was the last major piece of near term mandatory capex at the company and should clear the way for improved FCF generation, all else equal.
The unusually wide spread between North American benchmark crude oil WTI and global waterborne crudes such as Brent has been a key driver of CITGO's high profitability year-to-date in 2011. The Brent-WTI spread - normally in the range of +/- $3 per barrel - has blown out to a $10-$15/barrel discount, due in significant part to ramped up production from Canadian Oil Sands and U.S. shale oil plays, matched to still-limited logistical takeaway capacity out of Cushing, OK to the Gulf coast, as well as the impact of supply disruptions in Libya. This gap has provided a near-term windfall for refiners positioned to take advantage of cheaper, landlocked North American crudes. CITGO has been able to take advantage of these crudes both at its 167,000 bpd Lemont, IL refinery (which can take about 100,000 bpd of heavy Canadian crudes directly), and at its Gulf coast refineries, which have WTI-related contract pricing on a portion of imported barrels. CITGO's EBITDA for the first quarter of 2011 alone stood at a very robust $541 million, versus $585 million for all of 2010, as calculated by Fitch.
CITGO's recent credit metrics have shown substantial improvement. At March 31, 2011, the company had debt/EBITDA leverage of 1.26 times (x), EBITDA/interest coverage of 6.06x, and LTM FCF of $926 million. The company's liquidity was good at March 31, 2011 and totaled $1.193 billion, comprised of cash of $56 million, revolver availability of $714 million, and A/R securitization availability of $423 million. Liquidity has also improved following the company's 2010 debt refinancing, which included the conversion of all of CITGO's variable rate IRBs (which required revolver-backed LoCs) to fixed rate IRBs which do not require such support. CITGO repurchased $290 million in IRBs which it currently holds in treasury.
Headroom on key covenants was good at YE 2010 and included a debt-to-cap ratio of 45.5% (versus a 60% limit), an interest coverage ratio of 5.02x (versus a 1.5x limit), and official liquidity of $731.5 million (versus a $400 million limit). The completion of ULSD projects at Lemont and Corpus Christi in 2010 should help improve CITGO's FCF on a go-forward basis as it marks the last major required capex initiative due in the near term. Near term maturities are manageable following the 2010 refinancing and include amortizations of existing term loans, with the next major maturity due the 2015 term loan 'B', of which $134.5 million remained at March 31, 2011.
CITGO's ratings remain constrained by their strong linkage to parent Petroleos de Venezuela SA (PDVSA; IDR 'B+' with a Stable Outlook), which is evidenced through the dividend policy to PDVSA, frequent appointments of PDVSA personnel into CITGO executive and board positions, CITGO's contracts to take approximately 250,000 bpd of PDVSA crude at its Gulf coast refineries, and uncertainty about the parent's ultimate intentions regarding its subsidiary. However, it is important to note that there are strong covenant protections in CITGO's secured debt which restrict the ability of the parent to dilute CITGO's credit quality. These include debt-to-cap limits, minimum liquidity, and minimum interest coverage ratios (all of which are tightened in the event CITGO upstreams dividends to its parent). The notching between the IDR and secured ratings reflects the strength of the underlying security package, which was expanded in 2010 to include the 167,000 bpd Lemont refinery, in addition to CITGO's Lake Charles and Corpus Christi refineries, petroleum inventories, and select accounts receivables.
Catalysts for an upgrade to the credit include higher ratings at the parent level, or additional evidence that CITGO's strong financial performance and recent reductions in leverage will be sustained going forward. Catalysts for a downgrade include another leg down in refining fundamentals, a liquidity crunch; or credit deterioration at the parent level resulting in more financial pressure on CITGO. Note that removal of secured lenders from the capital structure could weaken the rationale for any notching between CITGO and PDVSA, given the substantial protections secured bondholder covenants provide to all CITGO bondholders.
Looking forward, Fitch anticipates that CITGO will be meaningfully free cash flow (FCF) positive in 2011 and 2012, due to the combination of further improvements in global refining fundamentals, the favorable impact of wide (but declining) spreads between Brent and WTI, and reduced mandatory capex requirements. We would anticipate a meaningful portion of CITGO's cash flows may be paid out in the form of dividends.
CITGO's other obligations are manageable. CITGO's pension was underfunded by $186.9 million at year-end 2010 versus $197.8 million the year prior. The improvement in funding status stemmed primarily from improved actual return on plan assets. CITGO's asset retirement obligation (ARO) was $18.5 million at year-end 2010, down modestly from levels seen the year prior. Rental expense for operating leases declined to $140 million versus $171 million the year prior, and included product storage facilities, office space, computer equipment, and vessels.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Parent and Subsidiary Rating Linkage' (July 14, 2010);
--'2011 Outlook: North American Refining' (Dec. 16, 2010);
--'Liquids Rich Shale Boom - A Tailwind for North American Chemicals' (April 18, 2011)
--'US Oil & Gas Stats Quarterly - Fourth Quarter 2010' (April 25, 2011);
--'Political Turmoil in North Africa and the Middle East', (Feb. 25, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage Criteria Report
2011 Outlook: North American Refining
U.S. Oil & Gas Stats Quarterly -- Fourth-Quarter 2010
Political Turmoil in North Africa and the Middle East (Implications for North American Upstream Companies)