ENEOS Holdings, Inc. -- Moody's affirms ENEOS' Baa2 rating; outlook remains stable

Rating Action: Moody's affirms ENEOS' Baa2 rating; outlook remains stableGlobal Credit Research - 09 Dec 2021Tokyo, December 09, 2021 -- Moody's Japan K.K. has affirmed ENEOS Holdings, Inc.'s Baa2 long-term issuer rating.The outlook remains stable."The affirmation of ENEOS' rating reflects our expectation that its earnings will continue to benefit from stable domestic refinery margins relative to other Asian markets," says Roman Schorr, a Moody's Vice President and Senior Analyst.RATINGS RATIONALEENEOS' recovery from the pandemic has accelerated as a result of strong oil and metal prices, putting it on track to exceed Moody's previous profit forecast for the year ending 31 March 2022 (fiscal 2021). Moody's expects current commodity price levels to be unsustainable and ENEOS' profit to decline once oil and gas prices correct. However, Moody's expects ENEOS to maintain credit metrics commensurate with the current rating even accounting for such volatility.ENEOS' Baa2 long-term issuer rating reflects (1) its leading market position as Japan's largest refiner, (2) the important role it plays in the central government's energy policy, (3) the relatively stable domestic refining margins, and (4) its diversified business portfolio, which helps to stabilize profit.At the same time, the rating is constrained by (1) the company's relatively high debt load, (2) the weaker margin of its petrochemical segment due to industry-wide overcapacity, (3) the long-term decline in petroleum product demand, and (4) the execution risk associated with replacing petroleum product demand by diversifying into new areas.Moody's expects refining margins in Japan to remain robust following the recovery from the trough of the pandemic due to the price discipline instilled by a duopolistic market structure that has resulted in greater stability than international markets. This will support ENEOS' margins and help offset weak performance in the petrochemical segment, which Moody's forecasts will remain loss-making through fiscal 2021.ENEOS' diversification will also help stabilize profits as the company expands its materials business and benefits from its competitive strength, where commodity price volatility is partly tempered by more resilient business lines such as functional materials and thin film materials.The company's debt quantum is high due to ENEOS' heavy reliance on short-term debt to finance its oil feedstock, necessitated in part by its mandate to stockpile national petroleum reserves. However, Moody's expects ENEOS' leverage, as measured by retained cash flow (RCF) to debt, to improve to pre-pandemic levels of around 20% and remain sustainably above 12%, supported by the recovery in refinery margins.Moody's projections incorporate the expectation that ENEOS will continue to adhere to its financial policy of balancing shareholder and creditor interests. Moody's expects this to mitigate business, financial and execution risks as the company aims to grow in new areas such as renewable energy and hydrogen to offset declining demand for its petroleum products.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook on ENEOS reflects Moody's expectation that the company will manage its capacity and costs to support a recovery in its refined product margin and to turn around its petrochemical losses over the next 12-18 months, and that it will maintain a financial policy that avoids a further rise in its debt.The rating could be upgraded if ENEOS' credit profile improves as a result of (1) increased diversification without an undue increase in business risk, or (2) higher refining margins from refinery closures that reduce fixed costs and overcapacity, while (3) RCF/debt remains above 25%.The rating could be downgraded if (1) profitability falls due to an adverse change in the domestic refining market, (2) business risks, volatility or leverage rises as the company diversifies outside its core business, or (3) liquidity weakens, while (4) RCF/debt falls below 12% on a sustained basis.The principal methodology used in these ratings was Refining and Marketing (Japanese) published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1277304. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.ENEOS Holdings, Inc., headquartered in Tokyo, is the largest refining company in Japan.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Roman Schorr Vice President - Senior Analyst Corporate Finance Group Moody's Japan K.K. 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