Equity
S&P upgrades Hungary's Mol over strong performance, fair conditions
The upgrade is primarily based on the improvement in Mol’s current and, in turn, forecast credit metrics, thanks to the company's strong performance and supportive industry conditions, notably high refining and petrochemical margins
, S&P said in a statement on Wednesday.The credit rating agency now forecasts that Mol will maintain a ratio of funds from operations (FFO) to debt of at least 60% on average over the coming three years.
“This level of FFO to debt sufficiently buffers the company's performance metrics, in our opinion, against declines or volatility in refining margins, which are still at above-average levels in the cycle."
In addition, S&P also believes Mol now has “sufficient leeway to carry out investments and acquisitions in upstream without putting a pronounced dent in its credit metrics."
That said, the rating agency considers the group’s weak ratio of reserves to production and the scale and location of producing assets as key credit constraints, but it believes Mol may address these weaknesses over the next few years.
"We are delighted by the upgrade of S&P, which means Mol also joins the illustrious club of fully investment grade issuers, yet another reflection of our resilient integrated business model and financial strength," commented József Simola, Mol Group Chief Financial Officer.
“We will continue to deliver strong results on the back of our high-quality, low-cost asset base, while our long-term 2030 strategy will transform Mol into a leading chemicals company and a major consumer and mobility services provider in CEE," he added.
S&P highlighted Mol’s cost-optimisation program, which it believes “brings sustainable benefits for profitability, and increased the share of less volatile retail and petrochemicals segments."
As a result, S&P believes Mol's EBITDA should rise slightly even if refining margins remain flat.
“Although the company plans to invest meaningfully in petrochemicals, we project the company will post positive free cash flow generation of at least Hungarian forint (HUF) 100 billion (EUR 320 million) in 2017 and 2018, therefore allowing for positive discretionary cash flow. This distinguishes Mol from the majority of its larger peers, which continue to struggle with covering dividends and capital expenditures (capex) with operating cash flows."
S&P noted that the stable outlook reflects its expectation that “Mol will maintain robust credit metrics, supported by positive free operating cash flow generation, while continuing to invest in its chemicals business."
The rating agency also believes Mol's strong performance will mitigate the impact of volatility in oil prices and refining margins, and that Mol's FFO to debt will stay close to 60% on average through the cycle, reflecting the benefits of the integrated business model.
S&P said it could lower the rating on Mol
- if its performance weakened due to a significant decline in refining and petrochemical margins, or
- if the company's debt were to increase materially from the current level due to acquisitions or financial policy decisions.
- S&P added that ratings downside could materialize if FFO to debt were to decline to persistently well below 60%, that is 50% or below.
- Also, should the resolution of the INA conflict be unfavorable for Mol, such as the asset expropriation, S&P could consider a negative rating action.
S&P said it could raise the rating
- if it sees a material improvement in Mol's business, notably on the upstream side, while the company maintains a strong balance sheet. This could occur if Mol acquires assets with meaningful upstream reserves that improve the balance between upstream and downstream, which has now shifted toward the latter.
- Positive resolution of the conflict with Croatian authorities related to INA could also help solidify its exploration and production business, although the terms of the potential agreement would be important.
