Premcor Refines Revolver In Erratically Profitable Industry

Premcor Refining Group has aggressive debt leverage and participates in the very competitive, capital intensive and erratically profitable petroleum refinery industry, according to Standard & Poor's. S&P has assigned a BB+ rating and a recovery rating of 1 to Premcor's new $1 billion credit facility arranged by sole lead Citigroup. Fleet National Bank, Bank One and SunTrust Bank were co-documentation agents for the revolver, which refinances an existing $785 million credit facility and provides letters of credit to support crude oil and feedstock purchases.

At the end of last year, Premcor had $1.45 billion of debt outstanding. New management, installed in 2002, made significant progress in strengthening the company's credit quality after tapping the equity markets. Additional deleveraging will likely depend on continuation of strong refining margins or accessing the equity markets further. But S&P has concerns. Premcor faces material capital expenditures through 2006 that along with already high finance expenses, could strain the company's available resources if margins fall below midcycle levels.

Although the near-term outlook for refining margins is bright as demand remains robust, inventories are relatively low and supply is constrained by new clean fuel standards. "The refining industry's history of boom and bust cycles suggest that a period of below-average margins will eventually occur," S&P argues. Premcor's capex plans for the next three years are about $640 million, $680 million, and $400 million, respectively. S&P's estimate of midcyle and trough operating cash flow is roughly $500 million and less than $150 million, respectively.

Moody's Investors Service has assigned a Ba2 rating to Premcor's facility. "The ratings reflect Moody's views on Premcor's financial and operating strength and its fairly actively managed collateral package," said Andrew Omar, v.p. and senior credit officer at Moody's. Premcor officials did not return calls.