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Cure For Pandemic's Spread To North American Refining Is Time

Cure For Pandemic's Spread To North American Refining Is Time

As 2020 began, investors could look back at the last decade and generally be pleased with the North American refining industry's overall financial performance.

After emerging from the depths of the 2008-2009 financial crisis, operating results were strong for independent refiners, aided by wide domestic crude differentials amid the shale revolution and consistent economic growth and consumer demand. With the exception of a relatively weak 2016, refiners were flush with cash, highly profitable, and generated cash flows that one could even describe as predictable. The years of strong operating performance provided some credit cushion with healthy balance sheets and liquidity positions, low financial leverage, and substantial financial flexibility.

Now, the coronavirus pandemic is testing the industry like nothing else quite has before: by reducing demand for the refined products it manufacturers to a level not seen in modern times. In April, U.S. gasoline demand had fallen almost 50% nationally to about 5.1 million barrels per day (bpd), the lowest since January 1969. Jet fuel demand has fared even worse, down over 50% to 463,000 bpd in the first half of April, the lowest ever recorded by the Energy Information Administration.

While there are signs that demand for certain products, such as motor gasoline, is starting to slowly recover, refiners still face a long road ahead.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

This is an unprecedented shock to the operations of North American refineries we rate. The demand destruction will significantly stress balance sheets and wipe out a large portion of EBITDA. We have taken some rating actions and will continue to review the portfolio through the second quarter. Our analytical approach to ratings on independent refiners already builds in the possibility for significant cash flow volatility. We typically focus on debt to EBITDA as the main financial ratio to assess a company's financial risk. Our debt to EBITDA downgrade trigger generally reflects our expectations for financial leverage during midcycle margins, which smooths out the peaks and troughs refiners experience through a commodity cycle (Table 1).

Table 1

U.S. Refinery Expectations In 2020
Issuer Issuer credit rating Business risk Financial risk Reported debt (Mil. $) Net debt/EBITDA forecast Downgrade triggers: debt/EBITDA; FFO/debt

Deer Park Refining L.P.*

BBB+/Negative/A-2 Fair Intermediate 927 3.25x-4.25x > 2x

Phillips 66

BBB+/Stable/A-2 Satisfactory Intermediate 12,963 3.75x-4.25x > 3x; < 30%

Valero Energy Corp.

BBB/Stable/-- Satisfactory Intermediate 11,460 3.75x-4.5x > 3x

Marathon Petroleum Corp.

BBB/Negative/A-2 Strong Significant 34,188 6x-7x > 4x

Motiva Enterprises LLC*

BBB/Negative/A-2 Fair Significant 3,836 3.5x-4.5x > 3x

HollyFrontier Corp.

BBB-/Stable/-- Fair Intermediate 2,933 3.5x-4x > 3x

Delek US Holdings LLC

BB/Stable/-- Fair Intermediate 2,395 1.75x-2x > 3.5x

PBF Holding Co. LLC

BB/Negative/-- Fair Significant 3,948 4x-4.5x > 4x

CVR Refining L.P.

BB-/Negative/-- Weak Significant 1,686 5x-5.5x > 3x

Par Petroleum LLC

B+/Stable/-- Weak Aggressive 1,017 3.5x-4x > 4.5x

CITGO Holding Inc.**

B-/Stable/-- Fair Significant 1,868 6x-7x Included in Petróleos de Venezuela S.A. bankruptcy

CITGO Petroleum Corp.**

B-/Stable/-- Fair


3,085 6x-7x Included in Petróleos de Venezuela S.A. bankruptcy
Total debt 80,305
*Ratings uplift from strategic link to parent: Deer Park ('bb+'; linked to Royal Dutch Shell (AA-/Negative/A-1+), Motiva (bb; linked to Saudi Aramco).
**Ratings constrained (CITGO SACP of 'bb') due to link with Petroleos de Venezuela S.A. (PDVSA). Ratings on PDVSA were withdrawn due to the lack of timely information on June 12, 2019.
Notes: Reported debt includes consolidated debt of the refiner and its operating subsidiaries, including operating/financing leases. Forecast represents group consolidated leverage metrics. Expected ratio range as of year-end 2020. Cash is not netted against debt for companies with a weak business risk profile.
FFO--Funds from operations.

According to our article "Key Credit Factors For The Oil Refining And Marketing Industry", published March 27, 2014, we assess average midcycle margins over a period of up to 10 years, which should include margins in peak and trough years. (Before the COVID-19 pandemic trough, the last trough was 2016.) We also adjust the financial risk profile modifiers for refining companies to reflect short-term volatility in credit ratios. For example, if a refiner generally maintains leverage below 1.5x on average through the cycle, we have the flexibility to assess its financial risk profile as modest or intermediate even though debt to EBITDA below 1.5x is minimal in the standard volatility table (Table 2). The adjustment depends on our view of a refiner's ability to manage its operations and balance sheet amid weaker refining margins and factors into the rating what we would regard as temporary, short-term disruptions to end-user demand or product supply.

Table 2

Cash Flow/Leverage Analysis Ratios--Standard Volatility
--Core ratios-- --Supplementary coverage ratios-- --Supplementary payback ratios--
FFO/debt (%) Debt/EBITDA (x) FFO/cash interest (x) EBITDA/interest (x) CFO/debt (%) FOCF/debt (%) DCF/debt (%)
Minimal 60+ Less than 1.5 More than 13 More than 15 More than 50 40+ 25+
Modest 45-60 1.5-2 9-13 10-15 35-50 35-40 15-25
Intermediate 30-45 2-3 6-9 6-10 25-35 15-25 10-15
Significant 20-30 3-4 4-6 3-6 15-25 10-15 5-10
Aggressive 12-20 4-5 2-4 2-3 10-15 5-10 2-5
Highly leveraged Less than 12 More than 5 Less than 2 Less than 2 Less than 10 Less than 5 Less than 2
FFO--Funds from operations. CFO--Cash flow from operations. FOCF--Free operating cash flow. DCF--Discretionary cash flow. Source: S&P Global Ratings.

We view 2020 as a severe down cycle for refiners' operations and are not solely rating to what will likely be the worst performance in over a decade. Our base case assumes operations for most refiners will start to improve in the latter part of 2020 as the economy opens up and the U.S. increases driving miles and travel. Our base-case forecasts for the sector typically give equal weight to 2020 and 2021. We've factored in a recovery in refining margins in 2021 and expect credit measures including debt to EBITDA will return to around or below our downgrade triggers.

Most refiners are taking steps to boost liquidity during the government-mandated lockdown measures through short-term credit facilities with their bank group, public note issuances, or a combination of the two. Many refiners we rate experienced a drain on cash liquidity due to the sudden and dramatic drop in crude oil prices, working capital changes, and the timing of crude payments. Most refineries paid for high-priced crude oil feedstock while receiving much lower prices on refined products, a significant use of cash. While this outflow will reverse as crude oil prices increase, the timing of the benefit to refining companies is uncertain at best. Refiners that use intermediation agreements--a financial arrangement whereby banks or other financial entities purchase crude on behalf of the refiner for a fee--are spared the working capital outflow. Delek US Holdings Inc., CVR Refining L.P., and Par Petroleum LLC use intermediaries to purchase crude feedstock.

We view the liquidity initiatives by refiners as supportive of credit in the short term, similarly to most management teams' view as a temporary insurance policy against the prolonged shock to refined product demand. Proceeds from the note offerings are held as cash on the balance sheet, which we net against total debt (unless we assess the business risk profile as weak or vulnerable). This added debt will likely have a minimal effect on 2020 credit ratios, but could prove damaging to long-term creditworthiness if the upturn in demand takes too long to rebound--or does not materialize in 2021. Refineries would burn through this cash as they consider whether to maintain a minimum level of refinery utilization in the 67%-70% range or idle select assets. We believe this strategy is a risky but effective short-term tool given our belief that economic activity should improve in 2021. (See Table 3 for refiners' current liquidity positions and recent capital markets activity.)

Table 3

U.S. Refineries Liquidity Positions
(Mil. $)
Issuer Credit facilities; sponsor loans Available Cash Total liquidity Post first quarter activity Pro forma liquidity

Deer Park Refining L.P.

840 279 3 282 0 282

Phillips 66

7,000 5,800 1,129 6,929 1,000 7,929

Valero Energy Corp.

6,010 4,765 1,515 6,280 2,375 8,655

Marathon Petroleum Corp.

6,750 4,749 1,633 6,382 3,500 9,882

Motiva Enterprises LLC

3,500 2,900 626 3,526 0 3,526

HollyFrontier Corp.

1,350 1,345 890 2,235 0 2,235

Delek US Holdings LLC

1,000 682 781 1,462 200 1,662

PBF Holding Co. LLC

3,400 2,500 589 3,089 1,000 4,089

CVR Refining L.P.

400 392 747 1,139 0 1,139

Par Petroleum LLC

85 85 62 147 105 252

CITGO Holding Inc.

0 0 1,417 1,417 0 1,417
Source: S&P Global Ratings, company reports.

We believe refinery utilization will average in the low-70% area for the second and third quarters before improving to the mid- to upper-80% area by year end (Chart 1). However, this assumes some momentum in an economic recovery and no resurgence in U.S. COVID-19 cases. It also assumes the industry works through the significant gasoline inventory glut accumulated since mid-March before refining operations can ramp up.

During a prolonged slump, refineries would consider shutting down operations and idling assets at particular locations. A full asset shutdown is an extreme choice because there are considerable costs when a refinery is restarted to ensure the mechanical integrity and safety of the asset. In April, Marathon Petroleum Corp. idled its 166,000 bpd Martinez, Calif., refinery. North Atlantic Refining Ltd. (not rated) idled its 130,000 bpd Come by Chance refinery in Newfoundland, Canada, in late March.

Chart 1


Gasoline inventory was oversupplied, and the industry was working it off, as the U.S. headed into lockdowns in March. Motor gasoline inventory is about 250 million barrels, about 5% above the five-year average and rising (Chart 2). We believe this will take several quarters to work down to historical levels if demand recovers.

Chart 2


Jet-fuel inventory is also rising (Chart 3), but refineries have minimized production better, blended jet fuel into other products, and shifted to other distillates that still have relatively strong demand.

Chart 3


We revised the outlook to negative on half of our rated portfolio. We factored into our analysis an anticipated extremely weak second quarter that will likely spill into the third quarter. Our forecast assumes demand gains momentum in the fourth quarter, which will lead to profitability and EBITDA closer to more normalized refining margins. Most refining margins are well below historic levels, the result of depressed crack spreads (Chart 4).

Chart 4


If demand does not show signs of recovery as anticipated by the fourth quarter, we believe independent refiners will face more ratings pressure as liquidity deteriorates and credit quality further weakens. Refining companies will be tasked to make tougher choices, and will have to consider more drastic steps such as dividend cuts or suspensions and asset sales or joint ventures to preserve liquidity and financial flexibility. We'll likely provide an update on the sector and rated issuers in the second half.

Table 4

Refining Issuers Breakdown
Issuer Comments Analyst

Deer Park Refining L.P.

Deer Park reported weaker-than-expected financial performance in 2019 under midcycle conditions due to significant planned downtime related to its Big Block turnaround and lower than expected gross margin per barrel. We expect Deer Park’s credit metrics to remain elevated in 2020, with debt to EBITDA in the 3.25x-4.25x range. We expect capital spending to be down sharply from 2019, when the company completed Big Block. We continue to expect operational and liquidity support from owners and affiliates in times of stress. Rebecca A Hu, CPA, New York, + 1 (212) 438 4605,

Phillips 66

Phillips 66 reported relatively strong financial performance in 2019 under midcycle conditions. Adjusted debt to EBITDA was 1.8x. We expect credit metrics to weaken modestly in 2020 due to much weaker refining margins in what we view as troughlike conditions for the refining industry. We expect utilization to decline from its refining utilization of 83% in the first quarter of 2020. The company has taken steps to preserve cash, including reducing capital spending and operating costs, and suspending share repurchases. We believe Phillips 66's strong balance sheet will enable it to maintain its dividend through this downturn. Stephen Scovotti, New York, (1) 212-438-5882,

Valero Energy Corp.

Valero is better positioned than peers to address the risks from lockdown measures related to the coronavirus pandemic given its low leverage, ability to defer capital expenditures (capex), access to discounted crudes, and commercial capabilities. Still, we will likely review the ratings should lockdown measures extend into the third quarter. Valero has no near-term debt maturities and can flex its capital program with expected growth capital spending of $1 billion allocated for 2020. We expect some discretionary capex to be delayed and operating cost-cutting initiatives. Balance sheet strength will likely enable the company to sustain its dividend through the cycle, resulting in year-end debt to capital of about 40% and debt to EBITDA of about 4x. At the end of the first quarter, Valero had over $8.5 billion in liquidity, including $2.4 billion cash (including cash held at joint ventures) and about $4.8 billion available under various lines of credit. We expect the second quarter to result in a significant draw on cash due to working capital requirements related to crude payments, but also marginal use of revolver draws in the third quarter. Consequently, we estimate the lowest liquidity at about $4.5 billion-$5 billion at the end of the third quarter. Aneesh Prabhu, CFA, FRM, New York, (1) 212-438-1285,

Marathon Petroleum Corp.

Marathon's consolidated credit metrics will deteriorate to above 6x in 2020. The majority of consolidated EBITDA is generated from its midstream and retail business segments, which supports our view that the integrated refining model is supportive of credit quality. With the recent $1 billion debt offering, we believe the company has more than sufficient liquidity to meet its cash needs over the next 12 months, including its upcoming debt maturities. We believe it has additional financial options to further improve liquidity and reduce outstanding leverage. This includes the potential spin-off of Speedway, which could occur over the next 12 months. We believe that would free significant cash to reduce outstanding leverage. It would also eliminate stable generating cash flows supporting the ‘BBB’ credit rating. With consolidated adjusted leverage materially above the 4x downgrade trigger, we believe Marathon will need to execute these soon to maintain the rating. Mike Llanos, New York, (1) 212-438-4849,

Motiva Enterprises LLC

Motiva reported a weaker-than-expected financial performance in 2019 under midcycle conditions. This was largely due to lower-than-expected gas crack spreads and the timing of its acquisition of Port Arthur Chemicals. Motiva's debt to EBITDA was above 4x in 2019, and we believe it could remain elevated over the next 12 months. We anticipate refining operations will contribute about 85%-90% of its gross margin and expect the rest from its fuel sales and marketing, supply and distributions, and chemicals business. We continue to expect Saudi Aramco and its affiliates to provide operational and liquidity support in times of stress. Stephen Scovotti, New York, (1) 212-438-5882,

HollyFrontier Corp.

HollyFrontier's leverage will be 3.5x-4x in 2020 as utilization across its refineries averages about 70%-80% and crack spreads average below $10, both material declines from 2019. However, the 'BBB-' rating is based on our expectation that leverage declines below 2x in 2021 as prices and utilization return to midcycle levels. We expect the company to lower its capex budget by about 15% in 2020 to mitigate short-term cash flow stress, however it plans to continue construction on some core growth projects. HollyFrontier benefits from some cash flow diversification given its core refinery business that includes five complex refiners with a combined 510,000 barrels per day (bpd) of crude oil processing capacity, recent growth in its lubricants and specialty products business, and ownership of Holly Energy Partners, its midstream master limited partnership. We recently affirmed the ratings with a stable outlook. Michael Pastrich, New York, + 1 (212) 438 0604,

Delek US Holdings LLC

Delek's $200 million add-on further supports its financial policy of operating with significant cash and liquidity. The company's large cash position results in forecast adjusted net leverage in the 2x area. Delek's gathering system and its proximity to Midland, Texas, serves as a competitive advantage, allowing Delek to source lower-cost feedstock from the Permian Basin, which it captures in its gross margin per barrel. In addition, as differentials widen, the company can further lower overall feedstock costs. Some of its refineries serve niche markets, allowing them to run at higher rates than industry averages. Its midstream operations are expected to generate between $210 million and $220 million of adjusted EBITDA in 2020 and its retail business approximately $40 million. Mike Llanos, New York, (1) 212-438-4849,

PBF Holding Co. LLC

PBF announced a number of strategic actions to improve liquidity and reduce costs, including the sale of five hydrogen plants for $530 million, reducing 2020 capex by approximately $360 million, reducing corporate overhead expenses by over $20 million, and suspending its quarterly dividend. The company does not have any material upcoming debt maturities the recent secured debt offering results in higher adjusted debt to EBITDA, above 4x in 2020, though this is partially offset by an improved liquidity position. PBF is one of the larger independent U.S. refiners with total throughput capacity of over 1 million bpd. The recent acquisition of the Martinez, Calif., refinery improves its diversity but further concentrates its position in California, which in our view represents a more challenging operating environment due to stringent environmental regulations. In addition, it is also concentrated in Petroleum Administration for Defense District 1, which further weighs on its overall credit quality. Though it has larger scale than similarly rated peers, its cash flows are more concentrated in refining than those of peers generating a larger percentage from logistics and retail cash flows. This helps offset the inherent cash flow volatility in the refining sector. If refining utilization and gross margin continues to remain weak such that its liquidity position deteriorates further and total adjusted debt to EBITDA is sustained above 4x in 2021, we would lower the rating ‘BB-‘. Mike Llanos, New York, (1) 212-438-4849,

CVR Refining L.P.

CVR Refining is a core entity to parent CVR Energy as it represent more than 80% of CVR Energy's cash flows. As such, our rating of CVR Refining mirrors that on CVR Energy, in which we also consolidate both debt and EBITDA from the CVR Partners chemical business. CVR Energy's financial performance was strong in 2019, driven by high refining margins. We now expect a spike in consolidated leverage in 2020 driven by the already planned turnaround of the Coffeyville, Kan., refinery and sharp demand decline in refining products amid the COVID-19 pandemic. Additionally, CVR Energy issued debt in January 2020 that raised consolidated leverage by $500 million, originally expected for growth projects and merger and acquisition activity but now kept on the balance sheet, which boosts the company's liquidity position. We expect gross consolidated leverage above 5x in 2020, improving below 3x by 2021 as refining products demand recovers and margins improve. The company has preserved cash with a 50% dividend reduction and reducing capital spending and operating costs. We believe CVR Energy's strong liquidity position will enable it to support a weak 2020 without a material credit impact. Diego Weisvein, New York, (1) 212-438-0523,

Par Petroleum LLC

Par increased its available liquidity by nearly 70% following a $105 million issuance of 12.875% notes on May 27, 2020. Other steps to preserve cash include temporarily shutting down the company's second Hawaii facility, reducing planned capex and turnaround outlays by $20 million-$25 million, and deferrals of noncritical expenditures across all segments. Combined with our forecast for lower throughput and depressed crack spreads across the company’s niche markets in 2020, the recent notes issuance increases our forecast for adjusted 2020 leverage of about 4x. Notwithstanding improvement to the company’s liquidity position, the notes issuance leaves Par with about 0.5x of cushion to our 4.5x leverage downgrade threshold. We forecast market stresses to be most severe in the second quarter before beginning to ease somewhat in the third. Should the depth or length of lockdown-driven collapses in demand extend beyond our forecasts, Par would have somewhat limited breathing room to the 4.5x leverage threshold. We recently revised our outlook to stable from positive. Jason Starrett, New York, (1) 212-438-2127,

CITGO Holding Inc.

CITGO's 2019 performance was slightly weaker than expected mainly due to weaker average margins at Lemont, Ill., under midcycle conditions. As a result, debt to EBITDA was slightly elevated at about 3.5x. Although we expect CITGO's consolidated credit metrics to deteriorate to 6.5x-7x in 2020, the company has a strong liquidity position with first-quarter ending liquidity of about $1.4 billion. While it cut capex modestly by about 10% and reduced opex by about 15% in 2020, we believe CITGO has sufficient liquidity to meet its capital spending needs and refinance upcoming debt. Unlike many peers that have deferred major turnarounds to preserve cash or fund distributions, CITGO will proceed with its scheduled turnarounds in 2020. We view this as credit positive as the refineries will be down during low margins and utilization, and subsequently be poised to capture higher expected margins in 2021 and beyond. CITGO has $614 million in secured debt maturing in July 2021, but otherwise has no need to access capital markets for additional liquidity. We expect the company to successfully refinance this debt and pay no distributions to equity due to U.S. sanctions against Venezuela. We continue to expect midcycle leverage between 3x and 4x and for CITGO to continue to successfully source heavy crudes from U.S., Canadian, Latin American, and other global producers to replace Venezuelan crude. Kimberly E Yarborough, New York, (1) 212-438-1089,
Source: S&P Global Ratings.

This report does not constitute a rating action.

Primary Credit Analyst:Michael V Grande, New York (1) 212-438-2242;
Secondary Contacts:Mike Llanos, New York (1) 212-438-4849;
Stephen Scovotti, New York (1) 212-438-5882;
Jason Starrett, New York (1) 212-438-2127;
Diego Weisvein, New York (1) 212-438-0523;
Kimberly E Yarborough, New York (1) 212-438-1089;
Research Assistant:Kyle Thumar, New York

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