20141126-高盛-Raise_2016_margins_on_improving_utilization__valuations_inexpensive_26页_641kb

Asia Pacific: Energy: Oil - Refining Summary

Core Content

This document provides an analysis of the refining sector in the Asia-Pacific region, focusing on refining margins, utilization rates, export dynamics, and stock valuations. It outlines the firm's updated outlook for 2015, 2016, and 2017, highlighting key changes in refining margins and earnings forecasts for major Asian refiners.

Main Points

Refining Margins Outlook

• Singapore complex margins are expected to decline in 2015 due to weak first-half performance but recover in 2016.
• The outlook for 2016 refining margins is more optimistic than previously thought, with an overall increase across all product types (gasoline, naphtha, distillates).
• 2017 refining margins are projected to be in between 2015 and 2016, reflecting a gradual recovery in global refinery utilization rates.

Refinery Utilization and Capacity

• The utilization rates for Asian refiners are expected to improve in 2016, reversing earlier concerns of decline.
• Chinese refinery projects have experienced delays, which have positively impacted refining margin expectations for 2016.
• Global refining capacity additions are expected to be in balance with incremental oil product demand in 2016 after accounting for announced shutdowns and delays.

Export Dynamics

• US refined product exports are likely to peak, as domestic demand growth outpaces refining capacity expansion.
• Russian exports are expected to decline, leading to increased refining activity in Asia and the Middle East.
• Asia/ME refiners are anticipated to export more due to the reduced US and Russian supply.

Feedstock Advantages

• Asian refiners are benefiting from lower light crude premiums and reduced working capital costs due to low oil prices.
• A potential relaxation of the US crude oil export ban could increase the supply of light oil, further improving feedstock conditions for Asian refiners.

Stock Valuations and Earnings Forecasts

• Asian refinery stocks are currently valued near 2009 trough levels, despite expected improvements in refining margins and returns.
• 2015 earnings are broadly in line with the consensus, but 2016 earnings are expected to rise significantly.
• The firm has revised target prices and earnings per share (EPS) for several Asian refiners, with notable upgrades for Thai Oil, S-Oil, and NZR.

Key Refiners and Rating Changes

Upgrades

• Thai Oil: Upgraded to Buy from Neutral.
• S-Oil: Upgraded to Buy from Neutral.
• New Zealand Refining: Upgraded to Buy from Neutral.

Downgrades

• Bangchak: Downgraded to Neutral from Buy.

Earnings Changes

• 2014E EPS has been reduced by an average of 36% due to inventory losses.
• 2015E EPS is expected to increase by 5%.
• 2016E EPS is projected to rise by 48%, driven by improved refining margins.

Key Risks

• Changes in oil prices and refining margins could impact the outlook.
• Currency fluctuations are a key risk, particularly for companies with exposure to the rupee and NZDUSD.
• Regulatory intervention and production disruptions are potential concerns for some refiners.

Target Prices and Potential Upside/Downside

Company	Currency	24-Nov-14 Price	Target Price	% Change	Potential Upside/Downside
Reliance Ind.	Rs	984.60	1,242	26%	26%
BPCL	Rs	719.45	914	27%	27%
HPCL	Rs	529.45	706	33%	33%
IOCL	Rs	343.35	447	30%	30%
S-Oil	W	47,000	58,000	23%	23%
SK Innovation	W	98,500	120,000	22%	22%
NZR	NZ$	1.98	3.20	62%	62%
FPCC	NT$	70.70	74.00	5%	5%
Caltex	A$	31.08	32.75	5%	5%
Essar Oil	Rs	95.95	118	23%	23%
Esso Thailand	Bt	5.40	5.60	4%	4%
IRPC	Bt	3.36	2.90	-14%	-14%

Summary of Key Views

• The 2016 refining margin outlook is significantly better than 2015, driven by Chinese project delays and improved utilization.
• Asian refiners are expected to benefit from feedstock advantages, lower oil prices, and strategic capacity adjustments.
• Valuations for Asian refining stocks are at historical lows, indicating potential upside from margin recovery.
• The firm upgrades several stocks, including Thai Oil, S-Oil, and NZR, while downgrading Bangchak.

Strategic Initiatives

• Asian refiners have undertaken optimization, consolidation, diversification, and other strategic initiatives to improve their position during the downturn.
• These initiatives are expected to benefit them as refining margins recover.

Conclusion

The refining sector in Asia is expected to see improved margins and valuations in 2016, following a weak 2015. The firm's updated forecasts and ratings reflect a more optimistic outlook for the sector, particularly for Korean and ASEAN refiners, who are well-positioned to benefit from the margin recovery.