Corral Petroleum Holdings AB (publ) Business Update ... - Preem

Our ability to generate cash depends on many factors beyond our control and, if we do not have enough cash to satisfyour obligations, we may be required to refinance all or part of our existing debt.Our ability to meet our expenses and service our debt, including the payment of principal and interest on any newnotes issued in a refinancing in cash, depends particularly on equity contributions from Corral Petroleum Holdings’ parentcompany, Moroncha Holdings, or its shareholder. Preem, our principal operating subsidiary, is affected by financial,business, economic and other factors, many of which we are not able to control. Moreover, the money generated from oursubsidiaries’ operations may not be sufficient to allow Preem to make dividends or other payments to Corral PetroleumHoldings, if so permitted in the future. In addition, tax and other considerations may effectively limit or restrict any futureability to receive dividends from Preem. If we do not receive sufficient equity contributions, if Preem continues to be unableto transfer funds to Corral Petroleum Holdings, including through dividends, or if we otherwise do not have enough money,we may be required to refinance all or part of our existing debt, sell assets or borrow more money. If such a scenario were tooccur, we may not be able to refinance our debt, sell assets or borrow more money on terms acceptable to us or at all. Inaddition, the terms of existing or future debt agreements, or potential joint venture, partnership or other alliance agreements,may restrict us from adopting any of these alternatives.Prices for crude oil and refined products are subject to rapid and substantial volatility which may adversely affect ourmargins and our ability to obtain necessary crude oil supply.Our results of operations from refining are influenced by the relationship between market prices for crude oil andrefined products. We are dependent on third parties for continued access to crude oil and other raw materials and supplies.We depend upon a small number of suppliers and expect to continue to rely on trade credit from our suppliers toprovide a significant amount of our working capital. Preem benefits regularly from approximately $500 million to $600million of trade credits from a small number of suppliers for the purchase of crude oil. The trade credit lines areuncommitted and therefore there can be no assurances that Preem can continue to benefit from such credit lines. Certain ofthese credit lines have recently been suspended but Preem has been able to replace a portion of these suspended credit linesand we have made one letter of credit drawing of $88 million under our uncommitted A3 credit line under the 2008 CreditFacility in June 2011. If our suppliers fail to provide us with sufficient trade credit in a timely manner, we may have to useour cash on hand or other sources of financing, which may not be readily available or, if available, may not be on termsacceptable or favorable to us. We buy 100% of our crude oil on the spot or term market.We will not generate operating profit or positive cash flow from our refining operations unless we are able to buycrude oil and sell refined products at margins sufficient to cover the fixed and variable costs of our refineries. In recent years,both crude oil and refined product prices have fluctuated substantially. Based on data from Platts, during 2008, the price ofDated Brent crude oil increased from $97 per barrel at the beginning of the year to a peak of $144 per barrel in July, andended at $37 per barrel at the end of the year. In 2009, the price of Dated Brent crude oil increased from $40 per barrel at thebeginning of 2009 to $78 per barrel as of December 2009. In 2010, the price of Dated Brent crude oil increased from $78.84per barrel at the beginning of 2010 to $92.55 per barrel at the end of December 2010. In 2011, the price of Dated Brent crudeoil has increased from $93.67 per barrel at the beginning of 2011 to $111.51 per barrel as of June 30, 2011. As a result, ourinventory of crude oil and refined products was exposed to fluctuations in price. We expect this volatility to continue. Thesefluctuations have had and will continue to have an impact on our results and on our compliance with the financial covenantsof our lending arrangements. See “Description of Certain Indebtedness—New Credit Facility—Financial Covenants.”Prices of crude oil and refined products depend on numerous factors, including global and regional demand for, andsupply of, crude oil and refined products, and regulatory, legislative and emergency actions of national, regional and localagencies and governments. Decreases in the supply of crude oil or the demand for refined products may adversely affect ourliquidity and capital resources.Supply and demand of crude oil and refined products depend on a variety of factors. These factors include:changes in global economic conditions, including exchange rate fluctuations;global demand for oil and refined oil products, such as diesel;political, geographic and economic stability in major oil-producing countries and regions in which we obtainour crude oil supplies, such as the North Sea and Russia;the ability and willingness of OPEC to regulate and influence crude oil production levels and prices;the cost of exploring for, developing, producing, processing and marketing crude oil, gas, refined products andpetrochemical products;5