We expect Thai oil refining companies to report weak earnings in 2Q23F, ranging from a small profit to a net loss of Bt1-2bn. This should line up with market expectations since Singapore GRM has been declining since early April on weak crack spread for middle distillates. Of the six Thai oil refiners, we expect TOP to report the highest net profit in 2Q23F, followed by BCP. We believe an average share price decline of 20% YTD for Thai oil refiners (except for BCP) largely reflects this; a near-term catalyst would be an upswing in GRM in 2H23 on stronger demand, especially for middle distillates. BCP is still the top pick given its diversified business model, which we see as less vulnerable to volatile oil price and GRM.
Refining margin hit by bearish demand in 2Q23. Singapore GRM was halved QoQ in 2Q23 to US$4.2/bbl (-49% QoQ) vs. a five-year average (pre-COVID) of US$6.1/bbl on an uncertain global economic outlook and slower recovery in demand in China than expected after its reopening. Gasoline remains the key support, with crack spread falling 11% QoQ to US$16.6/bbl versus a plunge of 42% QoQ to US$14.6/bbl for diesel and 47% QoQ to US$14/bbl for jet fuel due to slower economic activities and lower demand for diesel from power plants as natural gas price normalized. On the supply side, new oil refining capacity gradually started up in 2Q23, mostly in the Middle East, with combined capacity of almost 1mb/d. More oil exports from China due to lower domestic demand exacerbated the pressure on the supply side.
Aromatics still the best support. Strong PX spread (+18% QoQ) continued to support integrated oil refinery earnings amidst new capacity additions. Higher demand for the alternative PX feedstock product, i.e. gasoline blendstock, continued to limit feedstock to produce PX in the region. This was offset to some extent by lower benzene-ULG95 spread (-21% QoQ), which was weak at US$71/t vs. 5-year average of >US$100/t on slower demand for downstream benzene products polystyrene (PS) and acrylonitrile butadiene styrene (ABS) which is concentrated in the home appliance and construction industries.
Retail marketing margin widened QoQ. Marketing margin for the retail oil business improved in 2Q23 (+17% QoQ) to Bt2.5/liter vs. the 5-year average of Bt2/liter based on EPPO statistics. Government intervention during lower oil price was less intense while the Oil Fuel Fund continued to repay its debt to operators. The Fund’s net position improved to -Bt48.7bn as of July 23, 2023 from -Bt121.5bn on Jan 1, 2023. Of this amount, the liabilities for oil price subsidy fell to Bt5.2bn from Bt84.3bn in the same period. We believe downside risk to marketing margin is lower at the current crude oil price of US$80/bbl± vs. >US$100/bbl in 2022.
Better earnings expected in 2H23F on refinery business. Singapore GRM has gradually recovered since mid-July with a QTD average of US$5.7/bbl. This was driven by higher crack spread for diesel and jet fuel while gasoline spread narrowed as the end of summer driving season approaches. A higher oil price is expected to be a short-term benefit for oil refiners via some inventory gains vs a loss in 2Q23. The IEA expects oil demand to rise in 3Q23 while OPEC+ undertakes a greater production cut. The US EIA expects Brent crude oil prices to gradually increase, reaching an average of US$80/bbl in 4Q23 vs. US$78/bbl in 2Q23. We expect those firms with marketing arms to continue to enjoy a reasonable marketing margin thanks to a less stringent cap on retail oil prices.
BCP remains top pick despite 20% rise in share price YTD. BCP’s share price increase reflects investor optimism about its acquisition of a majority interest in ESSO, which we see as an accretive acquisition with a fair purchase price, providing earnings and synergy benefits in operations and marketing. This will be an additional driving factor for BCP apart from business diversification. Management expects the transaction to be complete by mid-Aug after BCP and ESSO’s 2Q23 results announcements, which will determine the final acquisition price. BCP remains our top pick on solid earnings in 2023 despite a fall of 29% due to abnormally high GRM and gas price in 2022, as business diversification minimizes the damage from volatile oil price. Apart from this and solid GRM in 2023F, we like BCP for its exposure to E&P in Norway, gaining from the strong oil and gas market in Europe to replace supply from Russia. Share price is up 20% YTD, outperforming its local peers and SETENERG and we see more upside after the ESSO deal is done.
Key risk factors: 1) Volatile oil price, GRM and FX, 2) changes in consumer preferences for fossil fuel and 3) changes in regulatory policy on GHG emissions, including carbon tax and carbon credit.
PDF Click > ENERGY230727_E
