INSIGHT: INEOS pushing to the limits

18 November 2008 17:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It is the disconnections in price across the main chemical chains and at the oil/petrochemicals interface that hurt: INEOS made that clear on Monday.

Companies should have worked on their ongoing abilities to generate cash. No chemicals maker worth their proverbial salt will have entered this downturn unprepared.

But the speed at which prices have fallen and the precipitous nature of the fall has taken most producers by surprise. It is fine, although hardly pleasant, if you have the financial leeway and the cushion that some firms have.

It is extremely uncomfortable if you have not.

INEOS said on Monday that it can generate cash at the bottom of the cycle - it has had time to prepare for the downturn. What has hit the company hard has been the collapse in the oil price and its impact on inventories.

INEOS operates refineries in Scotland and France alongside its olefins, polyolefins and other chemicals operations.

These refineries have a vast appetite for crude oil and the cash needed to buy it, at whatever price. But the price of oil continues to deteriorate - there is even some talk of $25/bbl crude - and the negative effect continues.

The collapse in downstream demand has also come as a surprise. Companies downstream from this major petrochemicals and inorganic chemicals maker are working off inventories.

There is still a great deal of discussion about what is, and what is not, declining real demand.

INEOS has been helped on the one hand and hurt on the other by the still high ethylene price - in Europe at least - and rapidly falling prices for polyolefins.

The combined impact for the highly leveraged company is an expected €560m inventory holding loss in the fourth quarter.

The inventory loss for the full year will be something like €400m, assuming $60/bbl oil, and an additional €180m charge will be made to full year EBITDA (earnings before interest, tax, depreciation and amortisation).

Before these charges, INEOS expects to generate €1.7bn-1.8bn of EBITDA this year set against net debts of €7.3bn, including a €2.3bn tranche of high-yield bonds.

INEOS has been forced to take steps particularly as covenants on its loans start to tighten now just when it does not want them too. It had expected the chemicals downturn earlier.

As reported on Monday, it is seeking a waiver of debt covenants from its syndicate banks which relate to its EBITDA-to-liquidity ratios.

In effect it wants two quarters of breathing space during which it hopes commodity, feedstock and product prices will bottom out and inventory swings work their way through the system.

By the end of that period, it wants to have a clearer view of the future and is promising to have redrawn its business model.

Currently, however, there is little visibility, although some indication that prices for polyvinyl chloride (PVC) are bottoming out.

INEOS had cash: €1,300m and €500m of availability under a revolving credit agreement at the end of September.

However, as credit rating agency Moody’s has noted INEOS’ working capital agreement is part of its senior debt facility and itself subject to covenants.

This is an extremely difficult time and although INEOS believes it can continue to generate cash at the bottom of the cycle, the headroom it has under the covenants on its loans has tightened.

The Moody’s downgrade on INEOS’ debt ratings takes into account “the company's elevated leverage and the resulting limited financial flexibility, exacerbated by the conditions of the current cyclical downturn and unusually high volatility in feedstock prices,” the ratings agency said on Tuesday.

That statement really tells it like it is.

It is the limited financial flexibility that exposes INEOS at an unusual time both for the refining and the petrochemicals sectors. Continued volatility of both feedstock and product prices will test the company to its limits.

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By: Nigel Davis
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