Thai Oil

Thai Oil Plc (TOP) 

Investment thesis

Earnings hitting bottom in 4Q14 and an improving refining operation in tandem with low oil prices has generated sentiment toward TOP. But we don’t think it’s sustainable—seasonal trade has almost ended and GRM will dip once low season starts in Feb. Major product stock builds across the globe and huge capacity additions present headwinds, in our view. Investors looking for Refinery stocks that will benefit from low oil prices, BCP is a better pick—a refining-cum-marketing play (low retail pump prices will boost sales and its GIM). TOP is a refining-cum-chemical play—poor aromatics margins will hit its GIM. To reflect our TOP profit forecast upgrade, we have raised our YE15 target price to Bt50 from Bt46. HOLD.                

FY14 bottom-line forecast cut—deep net loss expected for 4Q14 

We have slashed our FY14 estimate from a profit of Bt4,393m to a loss of Bt2,748m on hefty stock losses and realization of “lower cost or market (LCM)” in 4Q14, totaling Bt12bn. Our revised model indicates a 4Q14 loss of Bt6,846m, deeper than 3Q14’s Bt2,175m. Yet, our core number is a profit of Bt1,306m, up from a loss of Bt845m in 3Q14 on a much better market GRM (we assume US$8/bbl against 3Q14’s $4.6/bbl, led by seasonality) and a lower crude premium and fuel & loss. Despite the quite impressive GRM, falling aromatics margin will have squeezed overall GIM to $7.7/bbl—PX-ULG95 and BZ-ULG95 margins dived to $252/t and $207/t from 3Q14’s $370/t and $320/t, respectively.           

Improved GRM means higher FY15 forecast (but still sub-par)

Despite a further stock loss to be booked in 1Q15, we expect the 1Q15 bottom line to flip into black ink on a reversed LCM number (of Bt2.4bn) and prevailing strong GRM. As such, we have upped our FY15 GRM assumption to US$5.5/bbl from $4.5/bbl earlier. Our bias remains bearish, as an influx of new refining capacity will put pressure on head-line margin, but our FY15 projection jumps 22% to Bt6,431m. That said, our upgraded number remains sub-par, as we expect weak aromatics margins to squeeze overall GIM.    

But risk to earnings still high—heavily on refining business… 

Under our revised FY15 model, the refining business comprises almost 90% of our GIM assumption of US$6.4/bbl, with aromatics and lube making up the balance. The outlook for PX is subdued, as a supply surplus persists and demand has yet to revive. The BZ outlook is even worse after a golden year in 2014—the BZ-ULG95 margin is now only $100/t It was over $300/t last year). The prevailing low oil price climate has prompted Naphtha-based crackers to boost output, yielding more Pygas (feedstock for BTX extraction).   

…and so off-season GRM a matter of concern 

Low oil prices improve the economics of most refineries, as they will run at full capacity. That would, in turn, act as a headwind to GRM. Major product stock builds and an influx of new refineries will squeeze margins when the industry enters low season in Feb. During 1Q15, 1.1mbpd of new refining capacity across the Asia-Pacific and Middle East is slated for commissioning test-runs (it takes ~3 months to ramp up to full production). Those twin effects during low season, lower output costs brought by the oil price slump will lead to product price falls and squeezed head-line GRM, in our view.