Fitch Ratings has affirmed Valero Energy Corporation's (Valero; NYSE:
VLO) ratings as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Unsecured credit facility
at 'BBB';
--Senior unsecured debt at 'BBB'.
A total of $6.56 billion in debt is affected by this rating action.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
Valero's ratings are supported by the company's
size, scale and asset quality as the leading North American independent
refiner, with approximately 3 million barrels per day (bpd) of
throughput capacity; its modest but growing access to discounted North
American shale crudes; ample financial flexibility; good free cash flow
(FCF) prospects; reasonable leverage; solid export capability out of the
Gulf (historically capturing up to 25% of U.S. export volumes); and
growing leverage to distillates following the completion of
hydrocracking projects.
Rating concerns center on uneven global economic growth; the high levels
of cyclicality which characterize the industry; an unfavorable
regulatory environment for refined products in the U.S.; and slowing
capacity rationalization. Also a concern is the company's exposure to
rapidly rising Renewable Identification Numbers (RINs) compliance costs,
which are expected to reach the $600 million-$800 million level for VLO
in 2013. Although less exposed to Brent-WTI crude oil spreads than
several other names in the sector, the sharp contraction in those
spreads has softened the company's second quarter 2013 (2Q'13) results
and is expected to continue to pressure year-over-year comparisons.
RECENT FINANCIAL PERFORMANCE
Valero's recent financial performance
has been solid. Latest 12 months (LTM) EBITDA at March 31, 2013, rose to
$7.6 billion while total debt fell to $6.9 billion, resulting in
debt/EBITDA of just 0.94x (0.9x on a pro forma basis including the
company's repayment of $300 million in 4.75% notes in June). EBITDA
interest coverage rose to 14.5x from 9.4x at YE 2011, while LTM FCF rose
to $1.34 billion, consisting of cash flow from operations of $5.12
billion minus capex of $3.39 billion and dividends of $388 million. As
stated above, VLO's 2Q'13 performance declined due to unfavorable
contractions in crude spreads as well as higher natural gas prices.
Total operating income for the quarter fell to $808 million versus $1.36
billion the year prior, but remains higher for the first half of the
year ($1.87 billion versus $1.12 billion).
FCF
The FCF outlook for Valero remains good, and Fitch expects the
company will be significantly FCF positive over the next two years.
Capex for 2013 is $2.85 billion but includes a relatively large (47%)
component of discretionary spending. FCF will also benefit from the
impact of the company's new hydrocrackers at Port Arthur and St.
Charles, both of which came online this year. Other tailwinds include
moderate but growing access to heavily discounted shale crudes, and
ongoing access to relatively cheap natural gas (up to 700,000 mmbtu/day
across Valero's system).
Fitch expects future uses of FCF will include expanded dividends,
buybacks (approximately $3 billion was left in repurchase authorization
at the end of the second quarter), as well as potential acquisitions.
Fitch anticipates the company will be significantly FCF positive over
the next two years in its base case.
PENDING MLP
Following the spin-off of the company's retail assets
in May into publicly traded CST Brands Inc. (NYSE: CST), Valero is
assessing the spin-off of a logistics-based master limited partnership
(MLP), similar to its spin-off of NuStar Energy L.P. (NYSE: NS) in 2001.
Assets which could be placed into the MLP structure include railcar,
rail loading, pipelines, and barge facilities. In 2012, logistics assets
earmarked for the potential MLP had pro forma EBITDA of $50 million-$100
million. As a result of its relatively small initial size, Fitch is
anticipating the spin-off will not materially impact Valero's results.
However, as with any MLP, it is important to see how fast assets are
dropped down from the parent, and what the parent does with cash
received from those asset sales.
LIQUIDITY
Valero's liquidity was robust at the end of the second
quarter, and included cash on hand, operating cash flows, two committed
credit revolvers ($3 billion unsecured revolver due 2016 and C$50
million due November 2013), a $1.5 billion A/R securitization facility,
and a separate committed LoC facility of $550 million, as well as other
short-term uncommitted facilities. Including cash of $1.86 billion,
total liquidity at March 31, 2013 was $6.24 billion.
Valero's near-term maturities are manageable; the company repaid $300
million of 4.75% notes that matured in June 2013. As a result, pending
maturities include $200 million due 2014, $475 million due 2015, and
nothing due 2016. Covenant restrictions on Valero's debt are light.
There are no major financial covenants on existing unsecured debt, but
Valero's main revolver had a net debt/capitalization ratio requirement
of 60%. VLO had significant headroom on this covenant at the end of the
second quarter, with net-debt-to-capitalization of just 18.8%. Other
covenants include change-of-control provisions, and limitations on
additional secured debt.
OTHER LIABILITIES
Valero's other obligations were modest. Its asset
retirement obligation at YE 2012 rose to $108 million from $87 million
the year prior, and was primarily linked to remediation for underground
retail fuel storage tanks. The deficit on the funded status of Valero's
Pension Benefit Obligation increased to -$578 million at YE 2012 versus
-$394 million the year prior, with the increase driven primarily by
actuarial losses. However, the shortfall remains small as a percentage
of underlying cash flows. Expected contributions to the plans in 2013
are $45 million.
Valero's hedging program is limited and aimed at hedging physical
commodity transactions (e.g. delays between crude loading and refined
product sales, ethanol corn purchases), although it also has a small
trading operation. In addition, Valero uses derivatives to manage
interest rate and FX risk. There are no investment grade ratings
triggers in any of its agreements.
RATINGS SENSITIVITIES
Positive: Future developments that may lead to positive rating actions
include:
--Debt reductions and a managerial commitment to lower debt levels and
maintaining a higher ratings going forward.
Negative: Future developments that may lead to negative rating action
include:
--A change in philosophy on use of the balance sheet, which could
include debt-funded acquisition, capex or share buybacks;
--An
extended period of negative FCF and rising leverage resulting in
sustained (through the cycle) debt/EBITDA leverage above approximately
2.0x-2.5x.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 8, 2012);
--'Full Cycle Cost Survey for E&P
Producers-2012 Numbers Up, but Adjustments Tell a Different Story' (May
28, 2013);
--'2013 Outlook: North American Refining' (Dec. 13,
2012);
--'Rating Oil Refining and Marketing Companies--Sector
Credit Factors', (Aug. 9, 2012).
--'Downstream M&A: Low Multiples
Limit Credit Risk for Buyers' (May 26, 2011).
Applicable Criteria and Related Research:
Downstream M&A: Low
Multiples Limit Credit Risk for Buyers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=631870
Rating
Oil Refining and Marketing Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682343
2013
Outlook: North American Refining
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695412
Full
Cycle Cost Survey for E&P Companies (2012 Numbers Up, but Adjustments
Tell a Different Story)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708783
Corporate
Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798433
ALL
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