CITGO, Tesoro Fall As Refining Sector Runs Low

The oil workers' strike in Venezuela has caused Fitch Ratings to lower CITGO Petroleum's senior unsecured debt rating from BBB- to BB- due to severe disruption of the country's oil exports. CITGO has been forced to find alternate sources for much of the crude oil usually supplied by Petroleos de Venezuela S.A. (PDVSA), the state-owned oil company of Venezuela and an indirect parent of CITGO. CITGO usually purchases 50% of its crude from PDVSA and has successfully acquired other crude sources throughout the strike.

But, Fitch states that working capital requirements have increased and could increase more because of the downgrade. A ratings trigger in the company's trade accounts receivable program could significantly reduce CITGO's liquidity. Unless CITGO receives a waiver on its credit facility, the downgrade will result in termination of the accounts receivable program. Fitch expects Tulsa, Okla.-based CITGO to maintain operations, but, the company remains on credit watch negative as the situation in Venezuela is very volatile and further financial deterioration is possible. Calls to Eddie Humphrey, CITGO cfo, were not returned.

* Fitch also lowered Tesoro Petroleum's debt ratings because of a constrained capital structure and weak credit protection during the severe downturn in the refining sector over the last four quarters. Tesoro's $1.275 billion senior credit facility was lowered from BB to BB-, while its subordinated debt rating fell from B+ to B. Sector woes are compounded by Tesoro's debt pile as a result of the Golden Eagle, Mandan and Salt Lake City refinery acquisitions. The ratings outlook remains negative as volatility and uncertainty continues in the global crude markets and U.S. refining sector. Calls to Tesoro officials were not returned.

Fitch does acknowledge that Tesoro is working to repair its balance sheet through cost cutting measures and reduced working capital requirements. As of last September, San Antonio-based Tesoro had not tapped its $225 million revolver. The oil refinery operator furthermore completed $200 million in asset sales, satisfying its amended credit agreement. Fitch, however, does fear that Tesoro will have to amend its facility again if industry margins do not pick up in the short term. Tesoro's facility also includes a $250 million "A" piece and an $800 million "B" loan.