Thai Oil

Thai Oil Plc (TOP)

Investment thesis: Last week, we accompanied Ms Nitima Thepvanangkul, TOP CFO, and other executives, on a non-deal roadshow to Singapore and Hong Kong. In all, we sensed that the investors we met are generally NEUTRAL or slightly negatively biased with regard to the industry outlook—particularly for refining margins—because new capacity additions are slated to start up next year. The most frequently asked questions concerned TOP’s growth strategy (organic & inorganic). The key discussion points are summarized below.
Prospects for refining & aromatics: Although new refining capacity is due to start up next year, TOP remains optimistic about refining fundamentals. Refineries will be decommissioned, while 10-15% of refining industry output will be fed to petrochemical plants, squeezing the supply of petroleum products in the market. On the aromatics front, TOP expects an up-cycle to commence soon and prevail into 2013, driven by substantial PTA capacity expansion. 
Outlook for TOP’s market GIM: The firm guided that next year’s market GIM should range US$8-9/bbl, consistent with the $8.5/bbl posted for 9M11. Furthermore, the forecast aromatics up-cycle presents scope for upside. Apart from the positive prospects for refining fundamentals, TOP’s market GRM will rise further: on: 1) a slimmer premium on light crude costs, given rising Libyan oil production, and 2) possibly fatter margin when the govt imposes the Euro IV petro product standard next year.
No discernable impact from the flooding: The firm said that the flooding didn’t have any significant effect on its performance—three Thai refiners (ESSO, SPRC and IRPC) were shut during 4Q11, so its refining utilization averaged 103% QTD. However, management guided that 4Q11 profit will soften QoQ, due to a declining gasoline crack spread and weaker aromatics/lube base margins. This decline will outweigh the effect of a slight stock gain.
New investment opportunities & possible acquisitions: TOP will spend a total of US$1.5bn in net CAPEX over the next five years on organic growth. Management said that the firm’s free cash flows of about $500m/year would easily cover average planned annual CAPEX of US$300m (the remainder is to be paid out as dividends). Asked about the possibility of buying Esso’s Thai refinery, TOP said that there haven’t yet been any formal discussions. Pricing will determine whether there will be a deal and the firm isn’t in any rush. Management said that PTT group is now focusing on growth opportunities across Southeast Asia, particularly in Indonesia and Myanmar.