Thai Oil

Investment thesis

We attended TOP’s analyst meeting last Friday. Management said there were expansion opportunities in Myanmar and Indonesia, but we feel the two projects are still in conception phase and subject to great uncertainty. The upgrading proposal to the Myanmar govt will be opened to competitive bidding, while expansion in Indonesia looks distant. One positive takeaway is the earlier-than-scheduled re-start of the refinery, but it was completed during a low GRM climate. While a bounce in margin is likely in 4Q14, we think the 3Q14 performance will be the worst of the year and a further consensus earnings forecast cut will reduce investor interest in the stock.               

Plant has now re-started 

The refinery has already re-started after a shutdown for a major overhaul that started in mid-June. TOP said the maintenance was completed nine days ahead of schedule. The firm has revised up its targeted FY14 run rate slightly to 96% from 95% previously. This also coincided with construction completion for two new projects—an HVU revamp and a CDU-3 crude preheat train improvement. TOP is optimistic that the two projects will add about US$0.3-0.5/bbl to its market GIM.        

Prevailing GRM weakness; may recover in 4Q14

The start-up of new refining capacity and seasonality have hit the Singapore GRM benchmark to a low for the year of US$3.6/bbl with a QTD margin of $4.6/bbl versus 2Q14's $5.8/bbl. Increased petroleum exports from China also squeezed margin. TOP believes GRM will recover, as high season will start in 4Q14 (in tandem with fall refinery maintenance, which peaks in Oct) and that the prevailing low margin has forced out high-cost producers. TOP understands that refineries in Japan, South Korea and Singapore have already cut their run rates.

Pending ex-refinery prices not a serious issue

Management said that NGO demands that ex-refinery prices be cut is not of concern. Petroleum products are a free market and sales prices are agreed between buyers and sellers, which are typically discounted to headline ex-refinery prices. The guidance confirmed our view that a revised price mechanism would not have a significant impact on the firm’s bottom-line; we anticipate about a 5% squeeze on its yearly profit. 

Expansion opportunity but still to be distant 

TOP is exploring expansion opportunities in Myanmar and Indonesia. The firm will soon submit a bidding proposal to Naypyidaw to upgrade the country’s existing 20kbbl/d of facilities and build a 50kbbl/d greenfield project. The winning bid will be announced by year-end. In Indonesia, TOP expects to sign an MOU with stated-owned Pertamina and other potential partners by year-end. The initiative aims to co-study upgrading plants to a total capacity of 1.2mbbl/d. Management said it has no details to offer yet, but Pertamina had indicated that the upgrading would yield an acceptable IRR of 15%.