Turkey’s leading oil refinery, Tupras, has received a negative credit rating from Fitch Ratings Inc. at the end of last month. Although Fitch had also changed the sovereign credit ranking of Turkey a week before, its analysts assure us that the two decisions are not linked together. According to Fitch, Tupras’ credit rating has been downgraded from stable to negative due to the company’s operating performance.
The report shows that one of the deciding factors for changing the rating was the coupling between the company’s latest financial performance and dividend payment. The financial performance of the company was lower than initially expected, whilst the dividend payment experienced was higher than expected. These two factors led to an FFO net leverage for the 2016-2019 period that is higher than Fitch’s threshold. Currently, the threshold between stable and negative lies at the 2.5x mark.
One of Tupras’ main issues is the rise in oil prices since the start of the year 2016. Since January 2016, the price of crude oil has risen by almost 30%. While this rise is beneficial to companies which produce oil, it is counterproductive for companies which purchase oil for refining, such as Tupras. An increased crude oil price translates into increased operating costs. According to their latest report, Tupras has seen a drop in operating profit of approximately 21%, compared to the same period of last year. However, Tupras is not the only company that’s currently suffering from the increase in crude oil prices. The entire oil refining sector has seen a drop in operating profit that can be linked to the current price trend for crude oil.
Although at a first glance, Tupras’ new credit ranking seems to be linked to Turkey’s political scene, the decision made by Fitch is mostly related to the overall drop in operating profits that have hit the entire oil refining sector.