|
Market sentiment on Thai oil refinery stocks continued to deteriorate over the past month, with share prices down 7-19% vs. the SET’s -1% and SETENERG’s -3%. Apart from expectation of weak 2Q24F results, we believe persistent regulatory risk lying in the government’s intervention in domestic energy prices has led to this fall. This uncontrollable factor is likely to intensify investor pessimism in the near term despite a gradual recovery in refining margin. We stay positive toward 3Q24 on rising GRM, driven by middle distillates (diesel and jet fuel). In this space, we like BCP (TP: Bt51) on a promising earnings outlook due to full-year impact of the acquisition of BSRC and diversified business model, and TOP (TP: Bt77) on positive the GRM trend in 2H24.
Mounting regulatory risks derail market sentiment. Market pessimism on Thai oil refineries has increased on concerns over news that the government will amend laws that control domestic oil prices and abolish the Oil Fund. Although the amendment is unclear in all respects, it still is hammering stock prices in the near term. We view that the abolition of the Oil Fund increases consumer risks when oil prices are unusually high, such as during the Russia-Ukraine war. We expect the government to review its policies and normalize the situation. The abolition of the Oil Fund, which has a deficit of Bt111.7bn (as of July 21, 2024), would pressure fiscal position even more.
2Q24F expected to be the year’s worst. Thai oil refining companies are expected to report weaker earnings QoQ in 2Q24F, hit by a plunge in market GRM (-53% QoQ), though with some offset from lower freight rate and competitive crude premium. Gain from stock and oil price hedging could help alleviate the depressing GRM. In general, we expect oil refiners to realize marginal stock gain of US$1.4-2.4/bbl in 2Q24 as crude oil price picked up from a low in late May to early June. Some oil refiners also reduced utilization rates in response to unfavorable GRM and for a planned major turnaround.
Market GRM expected to recover in 3Q24. We expect higher crack spread for middle distillates (diesel and jet fuel), driven by seasonal demand, to drive market GRM in 3Q24, though expect a fall YoY from US$9.6/bbl in 3Q23. This will be backed by higher demand in Asian markets, including South Korea where the government extended the tax cut on fuel for automobiles by two months, until end-August. Further, oil exports from China are expected to decline due to lower production rates despite a new oil export quota. Demand for jet fuel is likely to improve on more air travel in 2H24 as IATA expects air passenger traffic in most regions to climb above 2019 levels given global growth rates in total passenger numbers of 10.4% YoY, especially in the Asia-Pacific region (+17.2% YoY).
BCP and TOP remain top picks. BCP share price fell 25% over the past three months, underperforming the SET’s -4% and local peers (-15% on average). We believe this was due to concerns on 2Q24 earnings in view of the planned major turnaround of its refinery and maintenance shutdown of OKEA’s largest operating field (Statfjord). Its valuation is still undemanding with P/E (2024F) of <4x and PBV of 0.5x (-1.8SD). We also expect attractive dividend yield of >7% (2024F). We also like TOP as a proxy play for GRM recovery in 3Q24 with attractive valuation at 5.4x P/E and 0.6x PBV and dividend yield of 6.6%.
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.
|
