Refiner’s credit crunch augurs wider pains

January 3, 2012

By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Lenders have frozen a $1 billion credit line at Petroplus, Europe’s biggest independent oil refiner, which speaks for 4.4 percent of the region’s total capacity. The loss-making Swiss group relies on the borrowing facility to buy crude, and may be forced to close production within days if it can’t find a new source of funds.

European rivals might be able to raise prices if a poor outcome for Petroplus speeds reduction in refining capacity, but low margins are likely to remain a widespread problem.

Refiners have been dealt a succession of blows since the financial crisis. First, the recession battered demand for oil products. Now, with another European recession looming, new refining capacity commissioned during the boom years is coming online. Left unchecked, UBS estimates these new facilities, mainly large-scale, low-cost refineries in the Middle East and Asia, will drive global capacity utilisation below 80 percent by 2015. That’s too low for an industry with high fixed costs. Getting to a more sustainable 85 percent would require shutting about 5 million barrels per day (bpd) of refining capacity over the next four years.

Petroplus’s 667,000 bpd of production capacity would make a useful dent if all five of its refineries shut down permanently. But even if the company sinks, the plant won’t necessarily disappear. Besides, the company said on Tuesday it intended to continue talks with its banks. France, meanwhile, has promised to do “everything it can” to help the group keep its French operations open. And Petroplus’s better facilities would probably attract buyers in the event of a fire-sale or bankruptcy.

Even if the Petroplus plant were decommissioned, European refining economics would remain challenging. Rivals’ valuations pose questions, too. The sector has underperformed the MSCI World Index by 19 percentage points this year. Yet less distressed independents, such as Finland’s Neste Oil and Greece’s Hellenic Petroleum, still trade on about double U.S. refiner Valero Energy’s three times EV/EBITDA multiple – and they don’t benefit from Valero’s access to cheaper WTI.

The woes of Petroplus might give struggling rivals a temporary shot in the arm. But the broader issues – depressed demand, excess capacity and volatile oil prices – are far from company specific.

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