Fitch Ratings has affirmed Puma Energy's Holdings Pte. Ltd's (Puma Energy) Long-Term Issuer Default Rating (IDR) at 'BB-' and Puma International Financing S.A.'s senior unsecured instruments at 'BB-' with a Recovery Rating at 'RR4'. The Outlook is Stable.

The affirmation reflects our view that Puma Energy's expected infrastructure disposal will have a neutral impact on its adjusted debt. We forecast gross leverage at around 4.0x on a funds from operations (FFO) lease-and-readily marketable inventory (RMI) adjusted basis. The rating is constrained by weak fixed charge cover ratios amid higher rental cost post infrastructure asset disposal, as well as certain volatility in profitability, for both EBITDAR and free cash flow (FCF) margins.

The ratings continue to reflect the group's geographical and business diversification, strong underlying demand drivers, which are partly offset by inherent cash flow volatility from its sizeable emerging-market exposure. Following the latest recapitalisation, we view Trafigura as more akin to a supportive financial investor looking to dispose of its controlling stake in the foreseeable future. We may reassess our approach if the parent's behaviour changes, leading to a detrimental impact on Puma Energy's creditor group.

Key Rating Drivers

Standalone Rating Approach Retained: We view Trafigura's 96.6% shareholding in Puma Energy as more aligned with an investment that it is looking to dispose of over the four-year rating horizon than a fully integrated business. We therefore analyse Puma Energy on standalone basis despite Trafigura's 96.6% ownership. Changes in Trafigura's behaviour leading to a material cash leakage from Puma Energy may lead us to reassess our view of linkage under our Parent and Subsidiary Linkage (PSL) Criteria.

Disposal Neutral to Adjusted Debt: Increase in lease-equivalent debt, due to higher rental costs, will largely offset a reduction in gross debt from the proceeds of the group's USD1.3 billion infrastructure asset disposal. It will increase rental costs to USD281 million per year, under Fitch's Corporate Rating Criteria (USD31 million above cash rental cost), capitalised at a 6.5x multiple. The transaction is subject to regulatory approvals and is expected to complete in 3Q22. Puma Energy plans to use USD285 million to prepay part of its subordinated shareholder loan from Trafigura on disposal of its infrastructure assets.

Leverage Adequate for Rating: Fitch expects FFO RMI- and lease-adjusted leverage of around 4.0x when the disposal is completed. This is on the cusp of our positive rating sensitivity and 1.0x higher than expected previously, post the group's rights issue in 2021. Puma Energy has announced a 2.5x net debt/ EBITDA (pre-IFRS 16) medium-term target (not adjusted for inventory), which it expects to comfortably meet in 2023.

Weak Fixed Charge Cover: The rating is constrained by its weak RMI-adjusted FFO fixed charge cover ratio, which we forecast at around 1.5x against 2.5x previously, due to rental costs being twice as high in 2023 relative to 2021 levels. Although a higher share of fixed (rental) costs is a burden on Puma Energy's credit profile, it is somewhat mitigated by greater clarity on the group's financial policy suggesting some financial discipline.

Lower Earnings: We expect EBITDA (after rents) to trend towards USD270 million (versus USD470 million previously estimated) over the next four years. This follows disposals of operations in Angola (5% of volumes in 2020), Pakistan, and Congo DRC during 2021, incorporates an USD140 million impact from the infrastructure disposal and captures slow volume growth over 2022-2025 with some fixed cost reduction.

Standalone Liquidity Improved: Puma Energy has extended an expanded revolving credit facility (RCF) by nearly USD100 million more than previously from a wide pool of banks. A portion of the facility has a tenor of two years, now included in our liquidity ratio. Trafigura no longer provides the group its USD500 million committed nor USD1 billion uncommitted facilities, which were never drawn.

Disposals Reduce Scale: We expect EBITDAR at above USD500 million, which still maps to 'BB' mid-point for scale, although lower than previously forecast (USD700 million in 2019). Puma Energy's retail segment is reduced by nearly 550 sites on disposals of operations in Pakistan and Angola. Angolan operations once contributed a significant share of reported adjusted EBITDA, before falling over the years to around 5% in 2021.

Strong Demand Drivers: Puma Energy benefits from strong underlying demand drivers in emerging markets. It has operations in nearly 40 countries, mainly in emerging markets, with the top 10 contributing around 75% of its reported 2021 EBITDA (including discontinued operations, pre-IFRS16). Exposure to emerging markets can make cash flows more volatile due to currency movements, as experienced in 2020, among other factors.

Limited Oil Price Risk: Puma Energy hedges its physical fuel supply. All of its supply stock is either pre-sold or hedged against price fluctuations. Therefore, in evaluating leverage and interest coverage ratios, Fitch excludes debt associated with financing RMI and reclassifies the related interest costs as cost of goods sold. The difference between RMI lease-adjusted and RMI-unadjusted lease-adjusted FFO net leverage is 0.5x-1.5x.

Derivation Summary

Puma Energy's closest peer is Vivo Energy plc (BB+/Stable), which operates on a smaller scale and with higher concentration in Africa (over 20 countries). Vivo Energy's capex intensity was lower than that of Puma Energy, whose significant investments in midstream infrastructure did not yield sufficient cash flows and led to increased leverage.

We expect Puma Energy's RMI lease-adjusted gross leverage at 4.0x following its rights issue and various disposals, including the planned infrastructure sale. This still remains above the leverage of Vivo Energy, whose rating is supported by a cash-generative and conservative financial profile, with RMI lease-adjusted net leverage below 1x.

Puma Energy's retail operations can be compared, to some extent, with those of EG Group Limited (B-/Positive), a global petrol filling stations and convenience retail/ food services operator. EG Group is larger than Puma Energy, its overall scale and diversification have improved through acquisitions and the group is present in the mature European, US and Australian markets.

EG has higher exposure to more profitable convenience and food-to-go retail than Puma Energy, leading to higher expected EBITDA and FFO margins of around 5% and nearly 3%, respectively, versus around 2% and 1.5% for Puma Energy. EG's rating reflects a weaker financial profile following a period of mainly debt-funded acquisitions, with FFO lease-adjusted gross leverage falling below 8.0x over the next 12-18 months.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Sales volumes at 16,400,000 m3 for 2022, growing 1.2% in 2023 and 2% from 2024

Stable gross profit unit margin over 2022-2025 at USD56-58/m3

Working capital outflow of USD76 million in 2022

Capex of USD202 million in 2022, followed by USD174 million per year in 2023-2025

Infrastructure disposals to yield USD1,300 million gross proceeds

Cash inflow of USD74 million in relation to 1H22 performance of the infrastructure business

No foreign-exchange impact following Angola disposal

No dividends or further M&A (post infrastructure disposal)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Evidence of sustained unit margins and FFO margin while maintaining EBITDAR at above USD500 million

RMI- and lease- adjusted net debt/EBITDAR sustained below 4.0x in combination with a record of compliance with its financial policy

RMI-adjusted EBITDAR/interest + rents cover sustainably above 2.0x

Enhanced financial flexibility translated into a record of positive free cash flow (FCF) generation and a sustainable standalone liquidity profile

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Lack of progress to refinance/extend its RCF by 1Q23

RMI- and lease- adjusted net debt/EBITDAR sustained above 5.0x

Change in Trafigura's behaviour or policy towards Puma Energy leading to a potential material cash leakage from the subsidiary, resulting in Fitch reviewing the linkage with Trafigura under its PSL Criteria. Assessment of open legal ring-fencing permitting value extraction from subsidiary combined with free potential access & effective control of subsidiary's cash by the parent, especially in combination with the above-mentioned factors, could result in negative rating action.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Adequate: As of 31 December 2021, Puma Energy had USD364 million cash, after deducting USD88 million restricted cash relating to the sale of its Australian business. It has refinanced its committed bank facilities at a higher level of nearly USD700 million, incorporating a two-year tranche of around USD230 million, which we include in the liquidity score calculation under Fitch's methodology.

Available liquidity is lower as Trafigura has now cancelled both its USD500 million committed and USD1 billion uncommitted facilities to Puma Energy, used as back-up facilities but were never drawn. However, with the two-year tranche Puma Energy has improved its own standalone liquidity.

Subsequent to the completion of the infrastructure disposal and use of proceeds to repay a number of outstanding credit facilities, the remaining USD745 million senior notes will mature in 2026, with materially reduced refinance risk and the potential need for back-up facilities. Puma Energy also relies on local banks to provide operating company debt (USD151 million at end-2021), which are drawings under uncommitted facilities.

Issuer Profile

Puma Energy is a globally integrated midstream and downstream oil group, operating in nearly 40 countries worldwide across the Americas, Africa, Europe and Asia Pacific.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2022 Electronic News Publishing, source ENP Newswire