Investing.com -- Moody’s Ratings has revised its outlook on Finnish oil refining company, Neste Oyj, from stable to negative. The A3 long-term issuer rating, the baa1 Baseline Credit Assessment (BCA), the A3 senior unsecured notes, and the (P)A3 rating for its €2.5 billion senior unsecured EMTN programme have all been affirmed by Moody’s. The Finnish government, which has a stable Aa1 rating, owns 44.2% of Neste’s share capital. The A3 long-term issuer rating benefits from a slight uplift due to the assumption of moderate support from and low dependency on the Finnish government.

The negative outlook on Neste is a reflection of rapidly declining profits due to an oversupplied market for renewable fuel products. This is projected to continue in 2025, and is only partially offset by a significant reduction in dividends and expectations for structurally growing end markets beyond 2025. This was stated by Janko Lukac, a VP - Senior Analyst at Moody’s Ratings.

The change in outlook on Neste to negative is due to an increase in its debt/EBITDA ratio to 3.9x at the end of 2024 from about 1.2x at the end of 2023. This is due to a pronounced decline in its renewable fuel spreads and a normalization in the traditional fuel business.

In response to the market downturn, Neste has announced a cut in its 2024 dividend to about €156 million from €922 million. The company has also initiated a cost-efficiency program to structurally reduce €350 million of fixed costs by the end of 2026. Neste plans to reduce capex investments to about €1.2 billion this year from €1.6 billion in 2024.

Neste’s actions to protect its balance sheet and liquidity reflect its commitment to maintain a strong investment grade rating. Once the expansion of its Rotterdam refinery is completed, the company will be able to generate significant free cash flow even at currently depressed prices.

The Finnish government, with a 44.2% stake in Neste, provides stability for the company as it executes its long-term strategy. This stake allows Neste more latitude to reduce dividends during downturns.

The baa1 BCA continues to incorporate Neste’s strong business profile with industry leading profitability. This is mainly driven by its competitive advantage of sourcing waste and residuals as the main feedstock. Neste is the largest player in a structurally growing end market for renewable fuels supported by both mandated demand from European and North American governments and voluntary demand.

A downgrade of the Finnish government’s rating or a decrease in the likelihood of extraordinary support could result in a downgrade of Neste’s rating. Conversely, an upgrade of the Finnish government’s rating or an increase in the likelihood of extraordinary support could result in an upgrade of Neste’s rating.

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