Over the past month, disappointment in 3Q24 earnings has pulled share prices of oil refiners down 5-20% vs. the SET’s -1% and SETENERG’s +3%. However, we believe the year’s worst is behind us as market GRM has gradually risen to 2022-23 levels, which will boost sentiment in the near term. We keep BCP (TP: Bt46) as the sector pick on an undemanding valuation and continuous earnings growth. The positive trend for GRM will also be good for TOP (TP: Bt71) but market pessimism on a possible delay of the refinery expansion will continue to undermine market appetite TOP, in our view.
Research
Energy - Preview 3Q24F: Refineries felled by stock loss
Expect disappointing 3Q24F results. We expect Thai oil refining companies to report net losses across the board in 3Q24F, hit by low market GRM at only US$3.6/bbl, based on Singapore GRM (-62% YoY, +3% QoQ), although 3Q is normally peak season for gasoline; there will be a partial offset by lower freight rate and crude premium. Earnings were sunk by huge stock losses after oil prices moved down towards the end of the quarter, though this was partly offset by gains from oil price hedging. We expect oil refiners to realize stock losses of US$5-6/bbl in 3Q24. It is notable that most Thai oil refiners kept utilization rates steady in 3Q24 despite unfavorable GRM, in contrast with lower global crude runs, in an attempt to optimize unit cost amidst weak GRM and the hit from stock loss.
Market GRM more encouraging. Market GRM in 4Q24 has gradually moved back up to US$5-6/bbl, similar to 2022-2023, driven by crack spread for middle distillate products (diesel and jet fuel) on higher seasonal demand in Asian and European markets for heating and air travel. This year, air cargo demand has surged to a new YTD record with Asia-Pacific contributing 42% to global air cargo demand growth and Europe at 26%. (IATA) On the supply side, traders in Singapore and China expect Chinese oil companies to cut their jet fuel exports to ~1mn tons in November from ~1.7mn tons in October on tight export quota availability. (S&P Global) This will continue to hold up price and crack spread of middle distillates for the remainder of 2024.
Top pick is BCP on valuation and growth outlook. BCP share price rose 8.7% over the past 3 months, underperforming the SET’s +11%, but better than most local peers. We believe this reflects optimism on 2025F earnings and undemanding valuation at 6.4x (P/E 2025) vs. an average 10.8x for regional peers. Additional synergy benefit with BSRC will be realized in 2025 on a full-year operation of both refineries. Dividend yield of 6-7% over the next two years is also compelling.
TOP stormed by negative news on possible delay of CFP. Our TP for TOP remains intact despite the recent decline in share price on pessimism towards outlook for earnings due to a possible delay of the refinery expansion under the Clean Fuel Project (CFP). As long as the dispute between the project’s EPC contractors and their sub-contractors does not interrupt existing operations, the adverse impact on TOP’s earnings in 2025 remains manageable, in our view, despite a slight downside risk to our forecast.
Risk factors. An economic slowdown would erode demand for refined oil products while oil price volatility may continue to cause stock losses. Other risks are asset impairment and regulatory changes on GHG emissions and government intervention in the energy business. Key ESG risk factors are the environmental impact and how it adapts to the transition to clean energy.