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Down but not out
A bumpy road ahead
In the next two years, refining economics will be dominated by the sharp
decrease of world oil product demand, significant capacity additions, and
continuing investments in biofuel production. With close to 5.8m bpd of
new atmospheric distillation capacity coming on-stream over 2009-11,
significant excess refining capacity should reappear very soon,
undermining refining margins for several years. In such a depressed
context, it is likely that more projects at early stages will be delayed for a
while or even cancelled. This may reduce the cost of construction in the
coming years. We have no bullish near-term prospects on the sector, but
note that different from EU/US refiners, Asia’s refiners will see a greater
quantum of economic improvement over the mid-term with the return of
stronger gasoil demand and a shift in consumption.
What should look for in Asian refiners?
We prefer refiners with comparably high gasoil yields and comparably
lower naphtha yields. We prefer non-export refiners – companies like
Thai Oil – where its key customers are its domestic market. Those with
wholesale and retail operations are preferred. Competing for sales in
international markets will be tough over the next two years. We believe
that Petrochemicals integration is a positive, as long as it is gas fed or
has the ability to run gas. Refiners with major capacity additions will find
it difficult to raise utilization (find buyers), and will likely see lower
margins against high capacity costs driving returns down. We prefer
refiners without any or with only nominal capacity additions over the next
two years – their book value will not only be intact. Low debt and high
dividend payers: for the near-term, dividend yield and book value, and
how intact these remain, are also good indicators of value. The sector is
down, but not out. We initiate coverage with actionable
recommendations on SK Energy, Formosa Petrochemical, Singapore
Petroleum Co and S-Oil.
Contents
The global refining environment .................................................................................... 3
Projects pipeline (2009-14) 3
Investment outlook 3
Which are worth buying and how much should we pay? 4
Asian refiners: what happened? 10
Appendices .................................................................................................................. 16
1. 5-Year outlook 16
2. Economic snapshots 19
3. Attributes of upgrading 23
Company updates........................................................................................................ 25
Formosa Petrochemical Corp 26
SK Energy Co Ltd 32
S-Oil Corp 39
Singapore Petroleum 45
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