Thai Oil

Result was in line with model

TOP’s net-tax bottom-line flipped into red ink of Bt2,175m versus profits of Bt2,094m in 2Q14 and Bt7,710m in 3Q13. The dive into the red was in line with our expectation and the consensus estimate. Stripping out extra items, the core number was also a loss (of Bt727m) versus earnings of Bt152m and Bt4,771m gains in 2Q14 and 3Q13, respectively.  

Results highlights

The negative highlights for 3Q14 were planned major turnarounds and, most prominently, huge losses on crude inventory and LCM. A month-long shutdown during the quarter dented the run rates of the refinery, TPX and TLB plants to 85%, 64% and 88%, respectively, from 2Q14’s 94%, 79% and 99%. OPEX also rose by US$0.4/bbl, due to the realization of maintenance costs. The oil price slide since Sept required TOP to book both stock losses and to adopt “lower cost or market” (LCM) accounting. It reported total losses of Bt3,560m (versus a Bt1.1bn gain for 2Q14), which translates into US$5/bbl. 

On positive side, market GIM improved moderately to US$5.5/bbl from 2Q14’s $5.1/bbl, buoyed by rising GRM and PX-ULG95 margin. Falling oil prices squeezed TOP’s crude premium to only $1.4/bbl in Sept (from $3.5/bbl in 2Q14) and mitigated fuel & loss in its refinery process—market GRM rose to $4.6/bbl from $4.4/bbl a quarter ago. Higher gains on FX and oil hedging totaling Bt1,256m (versus 2Q14’s Bt884m) also somewhat eased the effect of huge stock losses. 

Outlook

We believed its 3Q14 earnings will prove to be the trough for the year. Yet, the 4Q14 bottom-line is likely to do little better than break even—we model for Bt161m. Assuming that the Brent price tracks US$85/bbl through to YE14, we still expect another US$3.5/bbl stock loss to be booked, but loss on LCM is unlikely. Re-starts from shutdowns and the seasonal GRM pattern would boost the complex’s run rates and market GRM, which should outweigh the effect of softening aromatics and lube base margins.  

What’s changed? 

Our FY14 NPAT forecast of Bt2,614m stands unchanged. The risks in our model are oil price volatility and slimmer aromatics margins than assumed. An Influx of new supply and returning refining capacity has squeezed PX-ULG95 and BZ-ULG95 margins to US$246/t and $274/t, respectively, in October from $371/t and $327/t in 3Q14.

Recommendation

Although the current valuation is not demanding (a YE15 PBV of ~0.9x), we advise standing aside. The variables in our FY15 earnings model are skewed in favor of downside rather than upside, as we will enter a full-fledged down-cycle of GRM and aromatics margins next year. Within Thai refining-cum-chemical space, we still prefer PTTGC.