We are Neutral on energy (oil & gas) despite a near-term catalyst from oil price, driven up by rising geopolitical tension. Brent has risen 7% over the past two weeks on concerns an escalation of the conflict could lead to supply disruption. SETENERG inched up only 1% in the same period but is still down 4% YTD vs. the SET’s +3%. We believe investor confidence on sector earnings remains low, especially for oil refiners. We are selective on our stock picks, choosing those that still have share price catalysts in the near term with attractive valuation and dividend yield. Top picks are BCP, PTTEP and PTT.
Research
Energy – oil & gas Stay Neutral amidst upside risk on oil price
Oil price sparked by intense geopolitics. Global oil prices are on the rise again, entering 4Q24 with a jump of >10% before cooling off after a few days when China refrained from adding new stimulus measures and more oil supply returned to the market after a brief disruption. Oil price was weaker in 9M24 than expected and led us to revise down our Brent price assumption for 2024F from US$85/bbl to US$82, the same level as in 2023. (Bloomberg consensus is US$81.4/bbl). We view that higher oil price could delay an interest rate cut due to inflation concerns and also hurt demand, which could lead oil price to fall back to US$80± on more production and slower demand.
GRM disappoints in 3Q24, but expected to recover in 4Q24. Average Singapore GRM in 3Q24 disappointed, falling a sharp 62% YoY to only US$3.58/bbl, though still +3% QoQ. This reflects slowing global economic activity and new refineries coming on stream this year, especially in the Middle East. Lower crude oil premium in 3Q24 at US$1.67/bbl±, vs. US$1.9 in 2Q24 will reduce crude cost pressure for Thai oil refiners in the quarter. We expect seasonal demand for middle distillates (diesel and jet fuel) to enhance market GRM in 4Q24, with less impact from China’s export quota.
Oil marketing hurt by negative volume growth. Retail oil marketing will continue to face two key challenges: slower demand and pressure on marketing margin, especially for diesel, due to the price cap and rising oil price. The business will have to depend more heavily on non-fuel revenue, which normally provides a wider EBITDA margin but much lower revenue.
3Q24F earnings outlook. We expect most oil and gas companies to report weaker profit QoQ in 3Q24F, particularly oil refiners, as GRM remained weak and the move down in oil price likely brought inventory losses. Lower profit at PTTEP, both YoY and QoQ, will also eat into parent PTT’s earnings in 3Q24F as the E&P business accounts for >50% of the parent’s total operating income.
Risk factors. An economic slowdown would erode demand for energy and petrochemical products while oil price volatility may 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.