Energy sector

Energy sector

- Oil and coal prices could be range-bound at the current level
- 2Q13F earnings performance could soften QoQ on seasonal effect
- BANPU is sector pick on its deep correction

1Q13A earnings recap – Strong growth except BANPU. Earnings performance of
energy companies improved a strong 54% QoQ but still fell 6% YoY. YoY was boosted by
strong oil price, GRM and FX gain. In the grouping, BANPU’s profit was disappointing
with a plunge of 55% QoQ and 59% YoY in net profit due to a plunging coal price,
pressured by lower coal consumption in the US for power generation and a decline in
China’s imports.
2Q13F outlook – Reversal of positive factors in 1Q13 could pressure 2Q13. After
the reversal of positive factors in 1Q13, we expect QoQ lower earnings in 2Q13F due to
lower oil price and GRM. To date, average Dubai oil price fell by 7% QoQ to US$101/bbl
due to lower demand upon maintenance turnaround of regional refineries and a dip in
Singapore GRM to US$5.93/bbl from US$8.57/bbl in 1Q13 due mainly to gasoline.
Crude oil price could stay above US$100/bbl threshold. IEA has slightly lowered its
forecast for global oil demand during 2013-18 (to -0.09mbpd from -0.02) in its
Medium-Term Oil Market Report, with non-OECD countries continuing to lead the
global demand recovery. Meanwhile, non-OPEC oil supply, mainly from the US, was
revised up to reflect the rising US shale gas and light tight oil and Canadian oil sands
production. This will help alleviate the impact of supply disruption in the Middle East
and North Africa. Coupled with the appreciation of the US$, this implies a capping of
upside to crude oil price. We believe OPEC will continue to be the key stabilizer of
global oil price and keep oil price above US$100/bbl to support their fiscal budgets.
Coal price should remain range-bound. The average coal price YTD of US$89.55/t
remained in line with our full-year forecast (US$90/t), down 7% from US$96.4/t in 2012
and 5% YTD. We maintain our view that coal price will remain range-bound at US$85-
95/t, which is the cash cost of marginal coal supply in the market. Coal producers will
stay in a cost savings mode to stay afloat in this poor market, expected to last through
this year or until demand from China becomes more encouraging. Demand outlook in
the longer term will be driven by the next round of new power plants in key importing
countries, i.e. Japan, Korea and India, which will be largely coal-fueled.
BANPU is our sector pick on deep correction. Share price has nosedived 70% from
its peak in 2011 and 41% since the SCBS rating downgrade and we believe the time has
come for investors to accumulate the stock, with an attractive PBV multiple at only
0.8x for 2013, vs. its historical average of 2x over the past 10 years. The last time it
traded below 1x PBV was in Oct 2008 during the last financial crisis before picking up
strongly to above 2x within six months. We believe the share price correction brought
by concerns of weak coal price and the Hongsa legal dispute has been overdone and
that earnings reached bottom in 1Q13. We look for a strong recovery in 2Q13F – which
could be a near term catalyst for share price, in our view.