Bangchak Petroleum

Below estimates

BCP reported a 3Q14 net profit of Bt381m, down by 72% YoY and 70% QoQ. Stripping out a gain on oil hedging of Bt176m, an FX gain of Bt175m and an inventory loss of Bt1,408m, core earnings would be Bt1,430m, up by 31% YoY and 152% QoQ. The result was 26% below our estimate, due to higher-than-assumed operating expenses (but it was 31% above the consensus). 

Results highlights

The core earnings growth was driven by: 1) a fatter market GRM (up by 44% YoY and 42% QoQ to US$6.9/bbl), 2) a greater crude run (up 100% QoQ [down 4% YoY] to 97KBD), 3) a fatter marketing margin (up 34% YoY [down 11% QoQ] to Bt0.71/liter) and 4) a bigger contribution from the solar power business, as Solar Farm Phase-3, which started up in 2Q14, operated for the full quarter in 3Q14—EBITDA of Bt709m in 3Q14, up by 91% YoY and 4% QoQ. Note that there was a 46-day maintenance turnaround at the refinery in 2Q14.

Outlook

As BCP maintains its FY14 crude run guidance at 90-94KBD, we expect the crude run in 4Q14 to increase by 9% YoY and 13% QoQ to 110KBD and marketing sales volume to rise accordingly. Also, market GRM should fatten YoY and be sustained stable QoQ, driven by high seasonal demand during the winter. Furthermore, we assume that marketing margin will increase YoY (and be flat QoQ), boosted by an improved industrial margin. 

Even though core earnings are expected to be strong, there is significant downside risk to BCP’s fourth-quarter bottom-line from further inventory losses. If the average 4Q14 Dubai crude price is US$85/bbl, we would preliminarily assume the firm’s inventory loss at about Bt5bn for the period. 

What’s changed?

We have cut our FY14 net profit forecast by 10% to Bt4,653m to reflect extra gains and the inventory losses booked for 3Q14.

Recommendation

Concerns about PTT’s share sell-down plan remain an overhanging issue. Also, we remain concerned about BCP’s plans to increase investment exposure to E&P. In the interim, there is downside risk to FY14 earnings from falling crude prices, while an expected GRM down-cycle next year limits the scope for stock price upside. The current share price implies an FY15 PER of 11x for the refinery and marketing units, a 10% premium to BCP’s long-term mean.