IRPC

IRPC Plc
Investment thesis: We attended the IRPC’s analyst meeting yesterday. Amid heightened concerns about weakening oil prices, we sensed that IRPC will be the least prone to 2Q12 earnings downside among SET-listed refining stocks—its weak 1Q12 bottom-line will be followed by a relative outperformance of its peers, we believe. Furthernore, the prospects for 2H12 earnings are much stronger, buoyed by the start-up of two Phoenix projects (Propylene Booster in Sept and Lube Group-1 in Aug).  
Hedging gain mitigates 2Q12 stock loss risk … We are fairly confident that IRPC’s 2Q12 stock loss will be much smaller than those of its peers. While the firm is likely to post a heavy stock loss on crude inventory in 2Q12 (given its end-March inventory cost of US$125/bbl versus a spot Brent price of $113/bbl), hedging gains should mitigate the effect. IRPC usually hedges its crude throughput a month before physical delivery for 30% of its total crude inventory (~5m bbl). As such, the recent oil price drop should enable the firm to realize a big gain on its hedging contracts.
…operational performance also set to improve: Management guided that the QTD market GIM has picked up from the 1Q12 nadir of US$6/bbl—the April number bounced sharply to about $9/bbl, driven by a broad recovery in chemical spreads. IRPC’s market product-to-feed stock bounced to $113/t in April from a 1Q12 average of only US$47/t. The firm is confident that chemical spreads bottomed out in 1Q12; the low margin environment in that quarter forced out high-cost chemical operators. Besides, a fatter lube base margin and a lower crude premium (the QTD average is $3/bbl versus 1Q12’s $4/bbl) has also boosted second-quarter market GIM.   
Concerns about PRP project have eased—one of two key boosters to 2H12 outlook: Despite the Independent Commission on Environment and Health’s negative review of IRPC’s Propylene Booster project (PRP) in March, management claims that the it can still go ahead. The Office of Natural Resources and Environmental Policy and Planning has already completed the public hearing process; it forwarded the results of the public hearing to the Department of Industrial Works. The firm expects to obtain an operating license by June; COD by September.