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Thailand Energy Sector Summary

Core Content

The Thailand energy sector is analyzed with an OVERWEIGHT rating, highlighting the potential for growth and value creation despite a low oil price environment. The report outlines the performance and valuation of key energy companies and provides an outlook on the oil and gas industry, refinery margins, and petrochemical demand.

Main Viewpoints

• Oil Price Outlook: The oil price is expected to remain low due to increased supply from OPEC and US shale production. Brent crude is forecasted to average USD55/bbl in 2015, USD52.5/bbl in 2016, and USD60/bbl in 2017. The low oil price environment is likely to persist as OPEC continues to flood the market and US production growth slows.

• Sector Earnings: Despite lower oil prices, earnings for most Thai energy companies are expected to remain strong. Refiners such as IRPC, BCP, and TOP are seen as benefiting from lower fuel expenses and resilient margins. PTT is highlighted as a top pick due to its integrated business model and the benefits from the gas price reform.

• Valuation Trends: Valuations for most Thai energy stocks are at or near the bottom of their historical ranges. PTT is the cheapest among peers at 8x FY16F PER, making it an attractive buy. The Hybrid Refiners (IRPC, BCP, TOP) are also rated as BUY due to their attractive valuations and strong earnings outlook.

• Downstream Focus: The report emphasizes the importance of downstream companies, particularly those with refinery operations, as they are better positioned to benefit from low oil prices. These companies are partially insulated from the slowdown in the Chinese economy, which is a major petrochemical consumer.

• Petrochemical Outlook: Petrochemical prices are expected to face pressure due to the slowing Chinese economy, but supply constraints in the polyethylene chain may help stabilize prices. Propylene supply is expected to grow more than ethylene, supporting better margins for companies like IRPC and BCP.

• Upstream Challenges: PTTEP, the only listed upstream player in Thailand, is rated HOLD due to its exposure to oil prices and the weak earnings outlook. The company's stake in the Mozambique gas project is also under pressure due to low LNG prices.

• Investment Thesis: The investment thesis is based on three key charts:

  1. Oil Price Trends: Oil prices are expected to remain low due to supply dynamics.
  2. Earnings Trajectory: Earnings for refiners and PTT are expected to remain strong despite oil price declines.
  3. Valuation Levels: Valuations are at the bottom of their historical ranges, offering a good opportunity for accumulation.

Key Information

• Oil Price Drivers: US shale oil production and OPEC's continued output are the main reasons for low oil prices.
• Refinery Performance: Refiners benefit from lower fuel costs and strong GRM (gross refinery margin). TOP, IRPC, BCP are highlighted as top refiners with potential for earnings growth.
• PTT's Strength: PTT is the top pick due to its integrated business model and strong performance in the gas sector, supported by the national gas price reform.
• Valuation Highlights:
  • PTT: 8x FY16F PER, the cheapest among peers.
  • IRPC, BCP, TOP: Attractive valuations with solid earnings outlook.
  • PTTGC: HOLD due to weak petrochemical profit expectations.
  • PTTEP: HOLD due to weak earnings trajectory and low LNG prices impacting its investments.
• Petrochemical Demand: The slowing Chinese economy may impact petrochemical prices, but supply constraints in the polyethylene chain may limit this effect. Propylene supply is expected to grow more than ethylene, supporting better margins.
• Gas Consumption: Gas accounts for 44% of Thailand's primary energy consumption, with 70% of PTTEP's production being natural gas. Thailand has sufficient gas reserves for 8–10 years of consumption.
• Upstream Outlook: PTTEP is the only listed upstream company in Thailand, contributing nearly one-third of the country's production. The government is considering new exploration bids, but the process is still in early stages.

Key Tables and Figures

• Valuation Table:

  • PTT: Buy, 8x FY16F PER
  • IRPC: Buy
  • BCP: Buy
  • TOP: Buy
  • PTTGC: Hold
  • PTTEP: Hold

• Oil Price Forecast:

  • 2015: USD55/bbl
  • 2016: USD52.5/bbl
  • 2017: USD60/bbl

• Refinery Margins: Refiners benefit from lower fuel costs and resilient margins, especially with the low oil price environment.

• Petrochemical Supply and Demand:

  • Ethylene supply growth is expected to be 3% in 2016.
  • Propylene supply growth is expected to be 5–6% per annum.
  • China accounts for 1/4 of global polyethylene demand.

• Investment Recommendations:

  • BUY: PTT, IRPC, BCP, TOP
  • HOLD: PTTGC, PTTEP

Risks

• Oil Price Volatility: Continued low oil prices could impact earnings for upstream companies.
• Chinese Economic Slowdown: May affect petrochemical demand and prices.
• Supply Constraints: May limit the impact of weak demand on petrochemical prices.
• Geopolitical Factors: The lifting of Iran sanctions could increase supply, affecting oil prices.