17 October 2012 04:38 [Source: ICIS news]
SINGAPORE (ICIS)--Fitch Ratings has affirmed its ‘BBB’ credit rating for South Korean firm SK Innovation (SKI) with a stable outlook, the European ratings agency said on Wednesday.
“The ratings reflect SKI's position as the largest refining and marketing company (R&M) in Korea and its high level of diversification among R&M companies,” Fitch said in a statement.
Fitch said that SKI has a refinery capacity of 1.12m bbl/day, with a nationwide distribution channels with 4,452 SK-branded gas stations as of end-2011.
“SKI commands the largest market share of around 34% in the domestic refinery sector,” the ratings firm said.
“Its higher degree of earnings stability relative to both peers and historical trend is provided by vertically-integrated operations which include petroleum R&M, petrochemicals, exploration and production (E&P), and lubricants,” it added.
Fitch said the Korean company should have a stronger ability to generate earnings in the second half of 2012, backed by inventory valuation gains because of higher crude oil prices.
In the first half of the year, SKI had incurred large inventory valuation losses of around Korean won (W) 200bn ($181m).
“Nevertheless, the operating environment for SKI is likely to remain challenging over the next one to two years, due to expansion of refining and petrochemical capacities in the region,” Fitch said.
“Fitch expects lower overall profit margins for SKI over this period,” it added.
SKI started commercial operations at its 26,000 bbl/day No 3 lubricant base oil (LBO) facility at Ulsan in June this year, while its it building a new LBO unit in Spain that is due to be completed by 2014, Fitch said.
The Korean firm also expects to complete its proposed 2.3m tonne/year expansion of its paraxylene capacity at Ulsan and Incheon by end-2014. The expansion is expected to more than double SKI’s PX capacity.
SKI is likely to get about half of the required W1,600bn funding for the upgrade of its Incheon refinery complex to PX-focused manufacturing facilities, from external investors, Fitch said.
“SKI's rating headroom will be materially reduced if this capex for upgrade is undertaken without new equity or involvement of external investors,” the ratings firm said.
Fitch said that the major risks for refiners, like SKI, “stem from fluctuations in petroleum prices and refining margins and the cyclicality of petrochemicals demand amid a continued global economic slowdown”.
($1 = W1,106.75)
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