Fitch Affirms Puma Energy at 'BB'; Outlook Stable
The ratings reflect Puma Energy's high leverage as well as a diversified vertically-integrated midstream and downstream oil distribution business model, with leading market shares in a number of countries, and a focus on high-growth markets.
While the company's business profile is supportive of the current rating level and is driving steady cash from operations, Puma Energy's leverage at end-2015 remained high for the ratings. The high leverage was a result of the company's investments in its growth strategy and one-off circumstances that affected the company's 2015 reported EBITDA. The Stable Outlook reflects our assumption that in 2017 Puma Energy's performance will improve and leverage should return to levels compatible with the ratings.
KEY RATING DRIVERS
EBITDA Improvement Drives Deleveraging
We expect FFO RMI-adjusted net leverage to improve to around 4x in 2017, from 4.2x in 2015. Deleveraging will be subject to improvements in EBITDA, as we currently do not factor in a decrease in net debt. Lack of material improvement in EBITDA or increase in debt as a result of higher-than-expected capex/acquisition spending (USD600m in our rating case), such that net leverage remains above 4x on a sustained basis could put downward pressure on the ratings.
Currency/End-Market Risk to Continue
Puma Energy's unit margins and EBITDA are not directly impacted by oil prices, as seen in 2015. Puma Energy mainly operates in semi-regulated and fully regulated markets, where the government sets a margin over prices for distributors.
However in 2015, unit margins were impacted by other factors such as FX and end-market risk. Puma Energy's downstream unit margins (gross profit) decreased to 71USD/M3 in 2015 from 85USD/M3 in 2014, due to currency devaluations against the US dollar and, to a lesser extent, cost pressure on certain B2B contracts. Changes to the company's geographical mix (generally margins in the Americas are lower than Africa) were also a contributor.
We expect Puma Energy's results to continue to be negatively impacted by FX and by pressure from counterparties to renegotiate margins on the company's B2B contracts. While we have seen some stability in certain currencies and an improvement in 1H16 results, driven by organic growth and a ramp-up of new projects, Puma Energy is exposed to a wide range of currencies, which has the potential to impact 2016 performance, albeit to a lesser extent than in 2015. A steep devaluation in currency takes around three to six months to pass on to consumers.
B2B and Aviation customers account for around one third of Puma Energy's gross profit, and we view this segment as less stable than retail and exposed to end-market risk. In 2015, this segment was negatively impacted by the mining sector, in particular, a decline in commodity prices. We believe that commodity prices have bottomed out, but we still expect some softness in other B2B segments such as transportation.
Moderate Execution Risk
Between 2012 and 2015 Puma Energy spent around USD5bn on maintenance and expansionary capex and acquisitions, while EBITDA only grew to USD667m in 2015 from USD532m in 2012. As part of its growth strategy, Puma Energy's asset base has continued to grow. We believe that moderate execution risk remains embedded in its strategy as some of the previous investments have yet to positively contribute to EBITDA. It has taken longer for some investments to come on-stream, while at the same time Puma Energy has been investing in their storage network, which although supportive of the company's downstream business, has not materially contributed to EBITDA.
We forecast that the company will continue to spend around USD600m annually on investments. Apart from maintenance capex of around USD100m, the rest will be used in green field projects as opposed to acquisitions of performing assets. This means a potential increase in project risk as they do not immediately contribute to EBITDA and they could experience delays.
Diversified with Leading Market Shares
Puma Energy is highly diversified by business, geography and customer. It has a unique integrated business model, with no direct peer on a global basis.
However, some of these geographies are correlated, as the company is highly dependent on emerging markets. Around one third of EBITDA in 2015 was generated in investment-grade countries, having fallen from close to 50% in 2014, due to expansion into more emerging market countries and also FX impact. This should recover to around 50% again as currencies stabilise and the group continues to diversify globally.
The ratings reflect Fitch's expectations that oil products will remain in demand in developing markets due to their essential nature, therefore enjoying limited price elasticity.
Limited Oil Price Risk
Puma Energy hedges its physical supply. All of its supply stock is either pre-sold or hedged against price fluctuations. Therefore, in evaluating leverage and interest coverage ratios, Fitch excludes debt associated with financing RMI (such as refined oil products) and reclassifies the related interest costs as cost of goods sold. The differential between RMI-adjusted and - unadjusted FFO net leverage is around 0.5x - 1.0x, supporting the IDR at 'BB'.
-Volume growth of around 10%-15% p. a
-Downstream gross profit margin decreasing to around USD60/M3 by 2019
-Downstream contribution decreasing to around 80% of total gross profit by 2019
-Around USD600m p. a. outlay for acquisitions and capex
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Enhanced business risk profile reflecting a successful execution of growth plans through acquisitions and greenfield projects, while maintaining sufficient geographic diversification
- Steady profitability and internal cash flow growth with EBITDAR surpassing USD1bn
- Free cash flow (FCF) /EBITDAR excluding expansionary capex (cash conversion) at or above 35% on a sustained basis
- FFO RMI-adjusted net leverage below 3.0x with evidence of deleveraging on a sustained basis
- Maintaining FFO fixed charge coverage above 4.5x (FY15: 2.4x)
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A sharp deterioration in sales volume due to the competitive or regulatory environment or reflecting difficulties in integrating acquisitions with EBITDAR falling below USD500m
-FCF/EBITDAR excluding expansionary capex (cash conversion) decreasing to 15% or below on a sustained basis
- Continued debt-funded acquisitions/investments leading to FFO RMI-adjusted net leverage remaining above 4.0x on a sustained basis
Puma Energy's liquidity is adequate and was enhanced in May 2016 when the company refinanced and increased its revolving credit lines to USD1.55bn from USD1.25bn. As of 30 June 2016 Puma Energy had cash and cash equivalents of USD325m and undrawn USD1.2bn credit lines (excluding the USD500m shareholder revolving credit facility) compared with USD400m of short-term debt.