Thai O&G sector to recover in 2020 with SPRC and TOP as top picks: UOB Kay Hian

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A view of the electronic stock boards at the Stock Exchange of Thailand
NOVEMBER 27, 2019 - 4:37 PM

THAILAND'S oil and gas (O&G) sector earnings should bottom out in 2019 and rise in 2020, thanks to higher gross refining margins (GRM) enjoyed by Thai refiners, according to UOB Kay Hian.

Refineries will see better GRM in 2020 due to no planned and unplanned maintenance shutdown, and the implementation of the International Maritime Organisation (IMO) 2020 regulation. 

The broker has made “buy” calls on Star Petroleum Refining (SPRC) and Thai Oil (TOP), with a target price of 14 baht and 81 baht respectively. 

The IMO 2020 implementation, which aims to limit sulphur content for all marine fuel starting Jan 1, 2020, should widen diesel margins and narrow high-sulphur fuel oil spreads. SPRC also expects an increase in petrol spread, as a limited supply of feedstock will likely force refiners to produce low-sulphur fuel oil instead of upgrading petrol products. 

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SPRC will raise its refinery capacity by 10 per cent to 175 thousand barrels per day (kbd) after the maintenance shutdown in the fourth quarter of 2019. Its guided operating cost will fall to US$1.80 per barrel (bbl) from the current US$1.95. With a 100 per cent utilisation rate, the brokerexpects SPRC to post core profit of 6.0 billion baht and a dividend yield of 7.4 per cent for 2020. 

TOP’s core profit will likely soar 196 per cent year on year to 12.7 billion baht in 2020, according to UOB. 

However, future prospects are not as promising for the other stocks in the O&G sector. 

New polyethylene (PE) supply, coupled with the uncertainty from the US-China trade war, threatens to further squeeze high-density polyethylene (HDPE) spread. PTT Group expects HDPE spread at US$440 to US$550 per tonne in 2020 as compared to the current US$303 per tonne. 

Huge capacity addition and declining demand of aromatics in the Asia Pacific and the Middle East in 2020 will continue to raise the paraxylene (PX) and benzene (BZ) spread. UOB notes that producers of high-cost PX are likely to cut their operating rates, as the current spread of US$124 per tonne is well below the breakeven cost of US$150 to US$170 per tonne. 

Notwithstanding the new accounting standard for Thai companies, TFRS 9 and TFRS 16, UOB expects minimal impact from both standards on O&G’s earnings. 

Meanwhile, PTT Group expects Dubai oil prices to move within US$55 to US$65 per bbl in 2020. Oil demand has dropped due to the global economic slowdown and higher US crude supply, but lower crude production from Opec and some non-Opec countries should partially offset the decline in demand. 

PTT highlights several key factors to look out for next year: the resolution of the US-China trade war, continued rise in US oil production, debottlenecking of the Permian pipeline in the US, and geopolitical unrest. 

SPRC shares closed at 10 baht at 12pm Wednesday, up 0.1 baht or 1 per cent; while TOP closed at 70.25 baht at 12 pm Wednesday, down 0.25 baht or 0.36 per cent.