Thai Oil

Thai Oil Plc (TOP) 

 

Hefty loss reported as expected

TOP’s 3Q15 NPAT flipped back to a huge net loss of Bt2,294m against reported profit of Bt6,228m in the prior quarter (but the number was on par for a YoY comparison). The disappointing result was in line with our expectation and the street projection. Stripping out extra items, the core number came in at Bt4,413m as expected, or a retreat of 21% QoQ—much higher than the core loss of Bt845m posted for 3Q14.   

Results highlights

The negative highlights of 3Q15 were exceptional losses on crude inventory, “lower cost or market” accounting and FX against THB/USD depreciation totaling Bt7.4bn. A seasonal soft patch in GRM caused by off-season middle-distillate crack spreads has squeezed its effective GRM to US$6.6/bbl from US$7.4/bbl a quarter earlier. Falling oil prices, together with the effect of slowing demand in China, have also lowered the margin contributions from aromatics and lube base businesses to US$0.5 and US$0.9 from US$0.8/bbl and US$1/bbl, respectively. With those twin effects, TOP reported its core-integrated margin (GIM) down to US$7.8/bbl from US$9/bbl posted for 2Q15.   

On the positive front, its refining utilization remained as high as 107%, or a similar level to that of 2Q15. Meanwhile, the averaged run rates at its aromatics plant soared to 91% from 84% in the prior quarter; and that of the lube base plant was quite stable from the 88% reported in 2Q15.

Outlook

We anticipate a strong bottom-line bounce in 4Q15. Hefty losses on crude inventory and FX will be unlikely to recur. Core integrated margin (GIM) would have recovered, buoyed by seasonal middle-distillate demand ahead of the winter season. Based on QTD petroleum crack spreads, our simulation model indicated a rise of US$1.4/bbl or 21% QoQ. With that, we modeled its bottom-line number to flip back into a big gain of Bt4.4bn from 3Q15’s Bt2.3bn loss.

What’s changed? 

We maintain our FY15 NPAT forecast of Bt12,806m unchanged at the moment—9M15 NPAT accounted for 66% of our full-year estimate. Fluctuations in oil price and the THB/USD rate remain the key variable factors to our projection.

Recommendation

While TOP is the most levered play to seasonal middle-distillate crack spread ahead of the winter season, we continue our NEUTRAL stance on the stock. An influx of refining capacity additions in 2016, mainly middle distillate-based refiners, will apply downward pressure on those product crack spreads. Having said that, we do not expect the spreads to sustain a higher-high pattern as they did this year; and so the firm’s core integrated margin is skewed toward the downside into 2016. Within the Thai refining space, IRPC remains our preferred refining pick.