Energy sector
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Back to the black on higher oil price
Valuation
stock/rating/target price (Bt)
BCP/neutral/22.5
Esso/sell/8.5
IRPC/neutral/4
PTT/buy/380
PTTEP/neutral/170
TOP/buy/72
3Q12F: Earnings turnaround in sight for oil and gas companies
Slight upside to 2012 forecasts if oil price stays put (or rises)
Maintain Neutral stance on the sector despite more optimism on oil price
Oil price has turned the tide. Following a plunge of 22% in 2Q12, crude oil price
(Brent) has regained 16% QTD in 3Q12 to US$111/bbl fuelled by constraints on the
supply side, mainly the EU embargo on Iranian oil, and geopolitical risk in the Middle
East. Global oil supply has also been below expectations because of unplanned outages
in non-OPEC countries – which OPEC’s production did not offset. On the demand front,
the IEA maintains its projection for demand growth of 800kbd p.a. for 2012-13F, driven
mainly by non-OECD Asia. We believe oil price could trend up for the remainder of the
year, although upside could be curtailed by the weak global economic outlook. We still
see upside risk to our 2012 forecast of US$108/bbl for Brent since the average price YTD
is at US$109.5/bbl.
Earnings turnaround for oil refiners increasingly likely. The recovery of oil price in
3Q12 has helped oil refiners make up for their huge losses in 2Q12. With average Dubai
oil price for Sep 2012 rising to US$111/bbl from US$94/bbl for June 2012, we estimate
oil refining companies could book stock gains of US$5-5.50/bbl in 3Q12. At this level,
they could make up ~60% of the stock loss booked in 2Q12. We estimate these
companies will report profit in the range of Bt1.3bn to Bt9.1bn in 3Q12F. Apart from
stock gains, their earnings were also supported by strong GRM during the quarter and
the write-back of inventory value that was written down at the end of 2Q12 based on
lower cost-or-market principle for conservative purposes in reporting profit.
Minimal impact of oil price on PTTEP’s performance. Since the average Dubai oil
price was flat in 3Q12 at ~US$106/bbl, there will be little boost to PTTEP’s average
selling price. Despite this, we expect higher sales volume - mainly from Bongkot South,
VN16-1 and S1 – to help bring recovery in PTTEP’s profit of 113.4% QoQ and 121.5% YoY,
as well the absence of non-recurring expenses booked in 2Q12, i.e. provisions for the
delays in Montara startup and a higher tax rate due to the depreciation of the Thai
baht.
PTT’s profit should be back on stronger footing. With most of its subsidiary and
associated companies reporting better performance in 3Q12F, we expect PTT’s showing
will improve by 273.5% QoQ and 47.2% YoY to Bt31.8bn. We believe the worst quarter
for this year is behind us, with all non-recurring expenses, mainly from PTTEP and its
pipeline business in Egypt, recorded in 2Q12.
Earnings forecast for 2012 should remain achievable. With oil prices inching back
up in 3Q12, we believe our earnings estimates for oil and gas companies are achievable
with upside potential if oil price does not fall below current levels.
Stay Neutral on the sector. We believe the market’s expectation of an earnings
turnaround in 3Q12F has to some extent been priced in, since share prices of oil and
gas companies have gained 6-20% during 3Q12. A slight decline in oil price in late 3Q12
has increased investor caution in investing in this sector, in our view and we still take a
Neutral stance on the sector. Our top pick in the sector is PTT as it is less vulnerable to
oil price than others, with more stable earnings from pipeline transmission business.
