Energy

Being bombed by weaker oil price

Energy

- 2Q14 recap: lifted by higher oil price and inventory gain. Net profit for the energy

sector improved strongly QoQ and YoY, thanks to inventory gains at oil refining

companies. PTTEP and PTT also contributed, with their profit up strongly, backed by

higher oil prices and gain from asset swap of Canada oil sand project.

- 3Q14F outlook: bombed by huge inventory losses. The sharp decline of oil price is

primed to take a huge chunk out of 3Q14F profits, especially oil refiners, as they will

have to book large inventory losses and weaker GRM. We expect some to be hurt to

the point of net losses for the quarter. By our estimates, the sector’s profit is headed

towards a plunge of 54% QoQ - though still up 21% YoY.

- Concerns on sector reform eased. Market concerns about the impact of energy

sector reform, especially with regards to retail oil price, eased in 3Q14 after the

National Energy Policy Committee (NEPC) took steps to restructure retail oil prices via

adjustment of excise tax and contribution to the Oil Fund. To date none of these

moves have had any impact on companies in the sector and in response the sector

index climbed 7.2% over the past six weeks, largely absorbing the positives and limiting

upside to share price from this factor.

- Weaker demand continues to depress oil price. Globally weaker demand for oil

has sent global oil prices into a freefall over the past three months. The IEA cut global

demand for 2014 to 900kbpd from 1mbpd previously in response to a weaker GDP

outlook, especially in Europe and China, and despite geopolitical problems in oil

exporting countries in the MENA region. QTD, the average oil price for 3Q14 is down 3-

6% QoQ. We expect higher seasonal demand and OPEC action to stabilize global oil

price to support oil prices in 4Q14 to stay above US$100/bbl.

- GRM could recover ST. Average Singapore GRM has fallen 24% QoQ to US$4.4/bbl,

making 3Q14 the lowest quarter in 2014. This reflects weaker regional demand,

especially for gasoline. Higher demand from rebuilding stock of heating oil ahead of

winter in 4Q14 will give some support to GRM, but slow global demand and supply

additions will continue to depress margin for the rest of this year and into next.

- Possible ST rebound for coal price. Regional coal price continues on the downward

path in 3Q14 with average price for Newcastle down 5.4% QoQ to US$68.8/t on QTD

average. Excess supply in the region will continue to erode coal price in the medium

term but there could be a short-term rebound in thermal coal price from industrywide

output cuts.

- Stick with PTTEP as the top pick. We continue to prefer PTTEP to others in the

sector given its improving earnings outlook driven by the assets acquired from Hess,

the startup of Zawtika project and no more losses from Canada oil sand. It should also

be shielded from energy sector reform, in our view. Current valuation looks

undemanding at 2014 PE of only 9.8x, -0.7SD from its 10-year average. We maintain

DCF-based TP at Bt210. Dividend yield of 4% is also supportive.