Chevron Phillips Chemical Co. LLC Downgraded To 'BBB+' On Expected Lower Demand And Earnings; Outlook Negative

  • We anticipate that a global economic slowdown in 2020 will hurt demand and earnings at Chevron Phillips Chemical Co. LLC's petrochemical businesses, which will more than offset gains the company had made over the past few years that resulted from global feedstock and pricing advantages.
  • We are lowering our issuer credit rating on the company to 'BBB+' from 'A-'. We are also lowering the issue-level ratings to 'BBB+' from 'A-'.
  • Our previous ratings had considered a slowdown in 2020 for the company due to factors such as new cracker and downstream product capacity coming online in the U.S. Gulf Coast but not to the extent we now consider. We expect 2020 credit metrics will be depressed from 2019 levels and that 2021 will be even lower if the economic conditions persist and if the company continues ahead with generous shareholder distributions and capital expenditures (capex).
  • We now anticipate that funds from operations to total debt will average 30%- 45%. This compares to our previous expectations for a range of 45%-60% that we considered to be appropriate at the higher rating.
  • The negative outlook, revised from stable, reflects risks that macroeconomic conditions could weaken more than we anticipate. The outlook also reflects the potential that shareholder distributions and capex could be higher than we currently expect in 2020 and 2021.
NEW YORK (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above. The rating action reflects the very challenging macroeconomic conditions we believe Chevron Phillips Chemical Co. LLC (CP Chem) will face over the next 12 months and the resulting weakening of credit metrics relative to previous expectations. We now anticipate funds from operations (FFO) to total debt will average 30%-45% over the projected forecast period. Previously, at the higher rating, we had expected FFO to debt to be on the higher end of the 45%-60% range. We expect that earnings from CP Chem's petrochemical businesses will be weaker in 2020 relative to our previous expectations. We believe that these future challenging conditions will more than offset CP Chem's history of benefitting from cost-advantaged feedstocks in previous years.
The negative outlook on CP Chem reflects risks that macroeconomic conditions could weaken more than we anticipate and that credit metrics could be lower than what we have considered in our base-case ratings. More specifically, we believe that FFO to total debt could be weaker than the 30% bottom threshold that we consider appropriate for the rating. On average, we expect FFO to debt to be in the 30%-45% range. The outlook also reflects the potential for larger than expected shareholder distributions and capex.
Our base case assumes a U.S. economic contraction, which hurts demand for CP Chem's products. The company's operations in the Middle East and exports out of the US would also be hurt by lower than previously projected GDP growth rates in China, Europe and more generally globally. We base these assumptions on our belief that demand in key end markets will shrink in 2020 because of global recessionary conditions. Despite these assumptions, we believe the uncertainty related to the ongoing impact of the coronavirus on various sectors of the economy could portend a greater economic slowdown than we factor into our ratings. We reflect this uncertainty in our negative outlook, and we factor in expected shareholder distributions and capex into our rating. We do not assume any acquisitions, debt-funded shareholder rewards, or sale of any significant businesses in our base-case scenario.
We could lower our rating on CP Chem if we expect the weighted-average FFO-to-debt ratio to drop and stay below 30%. We could downgrade the company if we believe earnings will weaken more than we had anticipated as a result of the disruptive effects of the coronavirus outbreak. CP Chem's pricing and demand have held steady in the first few months of 2020, but we believe demand and pricing could be pressured as end markets weaken. We could also lower the rating if CP Chem continues with shareholder distributions at elevated levels or if it continues with very large capital outlays for its USGC II project that hurts credit metrics. Lastly, our rating contemplates a supportive relationship with parent, Chevron Corp. We could lower ratings on CP Chem if the credit quality of Chevron deteriorated sharply.

We could revise our outlook to stable if CP Chem's earnings weaken less than we anticipate or if we believe end markets could bounce back quickly. We would require a brief demonstrated track record of at least a few quarters of improving volumes and earnings. However, we would consider the volatility in earnings from CP Chem's businesses and assess the sustainability of such an improvement before considering a positive rating action. We would also assess the likelihood for changes in shareholder distributions or increases in capex before revising our rating or outlook.
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