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Marine fuel standards to lift earnings, may not 'definitively' impact ratings

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Marine fuel standards to lift earnings, may not 'definitively' impact ratings

Tighter marine fuel sulfur standards that go into effect at the beginning of 2020 should boost the earnings of U.S. refiners, but may not substantially impact the credit outlook for the sector, analysts at S&P Global Ratings said in an Oct. 7 report.

The International Maritime Organization, or IMO, will lower the marine fuel sulfur cap from 3.5% to 0.5% on Jan. 1, 2020. Experts have said the regulation will result in a 20% shift in the high-sulfur fuel oil market to drive a steep increase of more than 1.4 million barrels per day in distillate demand.

"While we believe the IMO 2020 will be credit positive for the refiners we rate, we do not think the implementation will definitively lead to higher ratings," the analysts wrote. "The possible spike in refining margins will be temporary. … Most likely, prices will revert as ships add scrubbing technology and refineries make necessary conversion investments."

At the same time the regulations boost diesel prices, they are expected to lower prices for products such as high-sulfur fuel oil. The analysts noted that U.S. refineries are already the most complex — the most capable of upgrading those cuts of the crude oil barrel into higher value products — in the world, having already made "significant" investments in their refineries from 2004 to 2008.

"Refining companies have increased rewards to shareholders in recent years, through higher dividend payments and multi-billion dollar share repurchases, which in our opinion is likely to continue," the analysts wrote. "We believe any excess cash flow generated from higher margins as a result of IMO 2020 will go to shareholders before organic growth or strengthening the balance sheet."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.