Bangchak Petroleum

Bangchak Petroleum Plc (BCP) 

Investment thesis

The worst quarter is now behind us, we believe, and BCP’s strong earnings growth momentum, buoyed by R&M margin expansion and volume growth, should catalyze the share price going forward. BCP’s earnings are expected to be the most resilient among refinery-cum-chemical firms, backed by a strong marketing margin, which is less volatile than GRM and a stable earnings stream from solar power business. Moreover, the overhanging concern over new shareholders is now easing. In addition, the valuation is undemanding—the current share price implies an FY15 PER of 9.5x for the refinery and marketing units, discount to its long-term mean of 10x and a deep discount to the regional average of 16.6x.  

Core earnings for 1Q15 to rise and bottom line to turn around 

BCP is expected to sustain core earnings growth momentum (both YoY and QoQ) through 1Q15, driven by a bigger crude run, a fatter market GRM, greater marketing sales volume and margin and a larger contribution from its solar power business. Moreover, the firm’s 1Q15 bottom line will turn back into the black on a shallower inventory loss (inventory gain is also possible depending on the crude price’s movements). Note that BCP’s inventory cost as of YE14 was US$54/bbl.

M&As to be key short-term growth driver 

Apart from expanding and improving its existing refinery and marketing businesses, BCP has planned to explore growth mainly through M&As in renewable energy, E&P, and biofuel businesses, with total investment budget of Bt20bn during 2015-2016. BCP targets to expand the firm’s renewable (solar, geothermal, biomass, and biogas) power production capacity 112% YoY (+132 MW) to 250 MW in 2015. Management pointed out that the potential acquisitions of renewable power plants are operating assets (30-50 MW per site) located in Thailand, and also in ASEAN. 

The firm also targets expansion of its E&P business (focusing on producing assets) through M&A with the aim to increase production capacity 150% YoY to 10kbd and the 2P reserve 49% YoY to 20m bbl in 2015. This would provide substantial scope for upside to the firm’s long-term earnings. Its EBITDA from renewable energy business will more than double if the additional 132 MW of renewable power plants contribute earnings for the full year. Note that BCP’s 118 MW solar power plants generated total EBITDA of Bt2.6bn in 2014.

General-mandate capital increase unlikely  

Management insisted that the general-mandate capital increase is unlikely unless there a MEGA M&A deal arises. The purpose of a general-mandate capital increase scheme is only financial flexibility. The sources of funds for the potential M&As in pipeline would be from internal cash (51%) and debt (49%).