Thai Oil

Thai Oil Plc (TOP)

 

Investment thesis

We’ve just finished a TOP non-deal road show to Hong Kong—accompanied by two C-suite executives, the CCO and CFO. Despite the recent fall in GRM, most of the investors that they met were still optimistic about its refining fundamentals, particularly the gasoline crack—but the refiner’s sluggish diesel crack was a matter for concern. That also raised doubts about TOP’s GRM outlook, given that it has the highest diesel exposure within the Thai refining space. Also, oil price rise, principally Murban crude (its most-used crude type, has dissipated the benefit of its crude premium—which quarter-to-date has risen US$0.90/bbl from 2015’s. TOP expected that the relatively high Murban crude premium may last through 2Q16; to then soften in 2H16. We have summarized key discussions as follows.                      

Production and crude sourcing flexibility 

Diesel featured greatly in the debate with issues such as increased exports from China (mainly teapot refineries), slowing GDP, a flooding of diesel in excess of prevailing high refining utilizations (to capture the strong gasoline crack) across the globe; and refining capacity additions. That raised the most frequently asked question as to whether TOP will need to reduce its utilization and realign product yield. Management was strongly convinced that the firm was one of lowest cost operators in the Asia-Pacific region, enabling the firm to run at high utilization. 

It can also re-optimize the product yield, but admittedly has limitations on production flexibility. TOP is able to reduce its diesel portion by 3-5% for jet fuel—while it has proven ability for the higher gasoline portion, which last year was up 19% from the norm of 16-17%. The crude sourcing was also a concern, given that 50% of its source is Murban. But, TOP tends to use a similar Murban crude portion but may slightly raise use of other crudes, such as Arab light (its key feedstock).                     

GRM outlook—buoyant gasoline to square with sluggish diesel

Bearing that in mind, TOP expected its effective GRM to have mildly softened YoY (but still in the range of US$7-8/bbl versus almost US$8/bbl in 2015)—the current GRM falls short to US$6-7/bbl after the recent collapse in the gasoline margin. However, the firm is very optimistic about the gasoline margin outlook and expected it to rebound soon through 3Q16, buoyed by the spring refinery maintenance shutdowns starting in Feb (peaking in May), US summer driving season and Ramadan. As such, it anticipated gasoline margin to average higher YoY to U$18-19/bbl (versus US$18/bbl in 2015). 

In contrast, it adopted a more bearish stance on the diesel margin; which anticipated to shrink to US$10/bbl for 2016 (versus 2015’s US$13/bbl). But it believed any downside from this level will be limited. The surplus on diesel exports from China’s teapot operations will decline. With the government’s price subsidy policy ranging US$40-100/bbl, local refiners will turn more to domestic sales. While its Murban crude premium has risen YTD, lower fuel & loss amid the weaker oil price environment has counterbalanced the effect. 

We’ve just finished a TOP non-deal road show to Hong Kong—accompanied by two C-suite executives, the CCO and CFO. Despite the recent fall in GRM, most of the investors that they met were still optimistic about its refining fundamentals, particularly the gasoline crack—but the refiner’s sluggish diesel crack was a matter for concern. That also raised doubts about TOP’s GRM outlook, given that it has the highest diesel exposure within the Thai refining space. Also, oil price rise, principally Murban crude (its most-used crude type, has dissipated the benefit of its crude premium—which quarter-to-date has risen US$0.90/bbl from 2015’s. TOP expected that the relatively high Murban crude premium may last through 2Q16; to then soften in 2H16. We have summarized key discussions as follows.                      

Production and crude sourcing flexibility 

Diesel featured greatly in the debate with issues such as increased exports from China (mainly teapot refineries), slowing GDP, a flooding of diesel in excess of prevailing high refining utilizations (to capture the strong gasoline crack) across the globe; and refining capacity additions. That raised the most frequently asked question as to whether TOP will need to reduce its utilization and realign product yield. Management was strongly convinced that the firm was one of lowest cost operators in the Asia-Pacific region, enabling the firm to run at high utilization. 

It can also re-optimize the product yield, but admittedly has limitations on production flexibility. TOP is able to reduce its diesel portion by 3-5% for jet fuel—while it has proven ability for the higher gasoline portion, which last year was up 19% from the norm of 16-17%. The crude sourcing was also a concern, given that 50% of its source is Murban. But, TOP tends to use a similar Murban crude portion but may slightly raise use of other crudes, such as Arab light (its key feedstock).                     

GRM outlook—buoyant gasoline to square with sluggish diesel

Bearing that in mind, TOP expected its effective GRM to have mildly softened YoY (but still in the range of US$7-8/bbl versus almost US$8/bbl in 2015)—the current GRM falls short to US$6-7/bbl after the recent collapse in the gasoline margin. However, the firm is very optimistic about the gasoline margin outlook and expected it to rebound soon through 3Q16, buoyed by the spring refinery maintenance shutdowns starting in Feb (peaking in May), US summer driving season and Ramadan. As such, it anticipated gasoline margin to average higher YoY to U$18-19/bbl (versus US$18/bbl in 2015). 

In contrast, it adopted a more bearish stance on the diesel margin; which anticipated to shrink to US$10/bbl for 2016 (versus 2015’s US$13/bbl). But it believed any downside from this level will be limited. The surplus on diesel exports from China’s teapot operations will decline. With the government’s price subsidy policy ranging US$40-100/bbl, local refiners will turn more to domestic sales. While its Murban crude premium has risen YTD, lower fuel & loss amid the weaker oil price environment has counterbalanced the effect.