Energy

Energy

Investment view. Although we see no near-term catalyst for the energy sector, we
expect this sectors’ earnings to be more resilient than others given the gradual
improvement in global economic outlook and good balance in oil demand/supply, with
OPEC as a supply stabilizer. The current valuation at <10x P/E for 2014F for several
energy stocks in SCBS universe (vs. the market’s 13x) with dividend yield of >4% is also
attractive. Our top picks for the sector are PTT and BANPU.
3Q13 earnings recap: boosted by oil price recovery. Most oil and gas companies
reported better profit than anticipated QoQ in 3Q13. This came from a rise in the
average oil price of US$5.3/bbl from 2Q13 (+5.3% QoQ) which gave refiners a huge stock
gain, enough to offset the weaker GRM on lower demand for gasoline and fuel oil.
Refiner core profit slid 7.9% YoY on lower oil price and product margin.
4Q13F outlook: marginal risk from volatile oil price. Operating profit will be stable
from 3Q13, with the caveat that volatile oil prices could bring some stock gain/loss in
4Q13F. Based on current prices, we believe oil price could average US$1/bbl in 4Q13F
and bring a slim stock gain/loss of US$0.5/bbl. Another risk for oil refiners is lower
GRM, which continues to weaken on lower demand for gasoline. This bodes ill for ESSO
and IRPC given their proportion of light refined products of >30%.
Oil supply could pressure crude oil price marginally. The IEA recently revised up
global oil demand growth for 2013-14F to reflect the strong demand in 3Q13 but we
still expect oil price to soften in 2014F as the market will be well supplied by non-OPEC
producers. With a rise in the use of clean energy such as ethanol and biodiesel, we
believe the oil price could be depressed from the supply side. At the same time, higher
supply could be absorbed by higher non-OECD demand, mainly in Asia and the Middle
East. Supply disruption from geopolitical uncertainty in the Middle East and North
Africa will continue to be a swing factor for the oil market. Average 2013 Dubai price is
expected to decline by 3.3% YoY to US$105.3/bbl, still beating the below-US$100/bbl
expected. We expect this could fall slightly to US$103-104/bbl in 2014F.
Near-term coal price outlook improving gradually. Market sentiment on nearterm
coal price outlook has improved from the previous three months. The API coal
price for 2014F rose 3.2% from the past three months to US$83.4/t, slightly above
current Newcastle price at US$82.8/t. We expect support from more disciplined coal
production by key players to reduce oversupply in 2014F. More production cutbacks will
be seen next year in Indonesia since many producers are now selling their coal at
below cash cost of ~US$80/t for new coal mines. Higher seasonal demand for heating
fuel in 4Q13-1Q14 should continue to support coal price in the near term.
Top Buys: PTT, BANPU. We like PTT, with a 15% fall in share price over the past two
months yet stronger earnings in 2014F due to the earlier resumption of full operations
of GSP#5 and possible upside from compensation for LPG and NGV losses. We also
favor BANPU on its improving earnings outlook thanks to its cost reduction program.