Macquarie Research, Asia Oil & Petrochemicals -Refining margin on solid rebound

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Asia Oil & Petrochemicals
Refining margin on solid rebound
Refining and Petrochemical Update
 Refining margin rebounded. Singapore Gross Refining Margin rebounded
strongly by 17.4% WoW to US$7.3/bbl, driven by robust margin expansion in
Diesel and Jet Fuel. Constructive US DoE data showed oil products demand
grew at 1.4% YoY and product inventory reduced by 6.2m bbls. In the shortterm,
our oil economist expects escalating violence and spreading unrest in
ME would be the key crude price driver, with growing risk of scarcity pricing.
 Petrochemical spreads generally declined, due to higher naphtha prices,
which climbed 6% WoW to US$993/ton. PTA and SM were the few that saw
strong spread improvement, up 11% and 10% WoW. There could continue to
be some pressure on chemical margin in the short-term, as 2H April naphtha
future price was heard at above US$1,000 level, driven by strong crude price.
Theme of the week – takeaways from Beijing Oil&Gas trip
 We held senior management meetings with Sinopec (386 HK, HK$7.78, Neu,
TP:HK$7.50) and CNOOC (883 HK, HK$17.82, UP, TP:HK$16) in end Feb.
After the meetings, we expect that NDRC will announce the new marketoriented
fuel pricing mechanism in 1H11, which could help remove the market
overhang on Sinopec. Meanwhile, Crude prices surging would benefit
CNOOC, China's pure upstream player. A US$10/bbl increase in crude oil
price could lead to ~18% EPS upside for CNOOC in FY12, followed by
~15%/12% for PetroChina (857 HK, HK$10.86, OP, TP: HK$ 14.25)/ Sinopec,
respectively.
Country-specific developments and views
 Taiwan: We remain positive on Formosa Group’s earnings outlook. While
there could be some margin pressure from rising naphtha and ethylene price,
earnings contribution from FPCC (who benefits from crude oil inventory gain
and better refining margin) should more or less mitigate the impact. Nan Ya
Plastic remains our top pick as it’s on track to make record earnings on the
back of robust MEG business and the electronic division recovery.
 Korea: We remain positive on Korean oil refining and petrochemical outlook,
despite near term issues surrounding political unrest in the ME and N.Africa.
So long as the current issues are contained, good buying opportunities will
likely be in place. Our top pick is Honam Petrochemical.
 Japan: After experiencing a drop a couple of weeks ago, GRM in Japan
recovered by 10% last week despite the increase in crude oil price (1.5yen/lt),
kerosene margin was flat WoW, diesel up 18% WoW and gasoline down 22%
WoW.
Outlook and Strategy
 We believe Asian upstream players are key beneficiaries of rising crude price,
with PetroChina and GAIL as our favourite names. We also remain positive on
petrochemical sector fundamentals, and see buying opportunities if current
ME issues are contained. Petronas Chem, PTT Chem and Nan Ya Plastics
are our top picks here.