Refining margins shot up -Refining and Petrochemicals update:: Macquarie Research

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Refining margins shot up
Refining and Petrochemicals update
 Refining margins shot up: Asian refining margins shot up 29% WoW last
week to over US$11/bbl, driven by strength in the prices of gasoline and fuel
oil. We believe Asian gasoline is benefiting from arbitrage trade to the U.S.
 Olefin spreads were also up sharply but were driven chiefly by a pullback
in naphtha prices. Aromatics spreads remained soft. New paraxylene
supply and re-starts at existing facilities are said to be putting pressure on
May pricing; PX spread is now on a three-week downward trend.

Country-specific developments and views
 Thailand: Last week was characterized by press reports claiming that Esso
Thailand is being pursued by Thai Oil. The reports were subsequently
denied by both companies. We have upgraded our recommendation on Esso
Thailand with the view that a previously justified ownership discount was no
longer applicable. The coming week will see 1Q results for the rest of
Thailand's downstream. On a risk adjusted basis our preferred names are
Thai Oil and PTT.
 India: With projected FY12 subsidy losses burgeoning to Rs1.8 trillion (up
from Rs780bn in FY11) due to a sharp rise in crude, an Empowered Group of
Ministers (EGoM) is slated to meet on May 11 to review fuel prices and
reduce subsidy levels (currently ~ Rs16/l for Diesl and Rs 9/l for Gasoline) for
PSU Oil Marketing Companies (OMCs - IOCL, BPCL, HPCL). We expect
price hikes for both gasoline and diesel to the extent of Rs 3-5/l and the
possibility of import-duty cuts on Diesel; we expect the stocks to rally on the
back of this. OMC valuations are cheap (<1.4x FY12E P/BV), especially
considering that stripping out the value of investments and upstream assets
they would look even cheaper on a PER basis at sub - 7.5x FY12E multiples.
 Korea: We are positive on the Korean oil refining and petrochemical sector,
but remain cautious on near term earnings visibility due to price cuts in local
gasoline and diesel prices, while petrochem margin contraction is underway.
We prefer LG Chem and S-Oil among our coverage as near term earnings
downside should be offset by company specific factors - I&E business
turnaround for LG Chem and PX capacity expansion for S-Oil.
 Taiwan: In the short-term, Taiwan's Petrochem sector should be negatively
impacted by the oil pullback. For Formosa Group, the impact will come first
from Formosa Petrochem, with potential inventory loss if the oil price drops
too sharply during the quarter. However, we would be buying Taiwan petros
after a 5-10% pullback, after the short-term oil price correction stabilizes. On
the other hand, petrochemical demand is being impacted by China's
consecutive tightening in 2Q. However, our China economist believes the
tightening should ease in 2H11, and thus we expect petrochemical demand to
return and remain positive on the sector in the long term.