Bangchak Petroleum

Bangchak Petroleum Plc (BCP)

 - Maintenance shutdown depressed 2Q14F earnings  
 - Marketing and solar businesses could help
 - Still a BUY on attractive valuation but PTT’s divestment still an overhang

2Q14F weaker QoQ – but not as bad as expected in spite of the 46-day maintenance shutdown in 2Q14F that cut refinery utilization to 40% (48.5kbd) from 82% (97.8kbd). We estimate net profit of Bt1.2bn, down 20.4% QoQ but up 205% YoY thanks to ~Bt500mn in insurance compensation for the new column for the crude distillation unit. Further, marketing profit contribution also rose QoQ on a higher margin for the retail segment. The company is expected to announce results on Aug 8.
GRM down on lower spread for middle distillates plus shutdown. The lower crude run also affected base GRM since it had to operate the refinery in hydro skimming mode, which raised fuel oil output to 22% of total refined products from 15% in 1Q14. Coupled with lower crack spread for middle distillates (diesel and jet fuel) we expect base GRM to fall to US$5.1/bbl in 2Q14F from US$6.4/bbl in 1Q14 and US$5.7/bbl in 2Q13. There will be an offset in a higher stock gain of US$2.3/bbl from higher oil price, more inventory and hedging gain of US$0.5/bbl. Accounting GRM is expected to increase from US$6.9/bbl to US$7.9/bbl. We believe a higher portion of local crude was also behind the favorable GRM, counteracting the lower crude run.
Favorable marketing margin continued in 2Q14F. Marketing operating performance also improved 24% QoQ and 49% YoY thanks to a rise in marketing margin to Bt0.74/liter in 2Q14F from Bt0.67/liter in 1Q14 and Bt0.59/liter in 2Q13 upon higher demand in the retail market.
Solar farms are all up and running. Profit contribution from solar power will continue to grow QoQ and YoY after all Phase 3 solar farms started up in 2Q14. At end-April, its solar farm was fully operational with combined capacity of 118MW. We estimate solar farm cash operating profit (EBITDA) at Bt630mn. Management guided that the EBITDA contribution from solar power could be ~Bt2.2bn in 2014F, higher than our estimate. This could be upside to our earnings forecast for this year.
Investment plan unchanged. Management confirms its Bt28.4bn investment budget for the next five years, mainly for the 3E project (Efficiency, Energy and Environment), which will boost refinery efficiency. On top of this, it is also keeping an eye out for investment opportunities in solar farms in Japan and participation in E&P.
Still a BUY with attractive return on TP of Bt44. We remain positive on earnings outlook, which now looks more sustainable, underwritten by its solar power business. Its oil refining business should also generate better profit after the major turnaround in 2014F, followed by completion of the efficiency improvement project in 2018F. Valuation-wise, the current P/E of 9x in 2014F looks undemanding compared with 13.2x for regional peers. Market concern on PTT’s potential divestment could be a near-term overhang for share price, although the impact on BCP’s operations would be limited.