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● Refining capacity additions in 2011 and 2012 are expected to be
at low rates (at 0.7% CAGR, 1.2% CAGR in 2004-10.) Supply
momentum should bottom around 4Q12. On headline, capacity
growth may pick up in 2013/14 (1.6% CAGR). However, these are
1) several quarters away and 2) as typical, susceptible to delay.
● Oil demand growth has been very strong (up 3.75% YoY) in 2H10.
Macro risks to demand (OECD, China growth concerns) seem to
be increasing, but the ‘capacity’ hurdle rate (0.7%, compared to
1.8% CAGR 2000-07) is not high.
● Continued power shortages in China, strong ‘Other Asia’ and
growing Indian oil demand can provide base for demand growth to
exceed supply growth near term. On base case, we continue to
see refining utilisations improving for at least the next two years.
● Seasonal strength in margins should kick in around 4Q11/1Q12.
Most Asian refining stocks had a good run late last year, with
large EPS upgrades; some already above mid-cycle valuations.
We prefer stocks with low implied expectations – Thai Oil, RIL, SK
Innovation. (Though these may be inexpensive for individual
reasons). Korea’s S-OIL displayed the largest sensitivity to
margins. A fall in crude can lead to stock losses, proving a near
term risk
Slowing capacity momentum
On paper, there is material refining capacity growth in 2013/14 – a
potential 3 mbopd of addition, for 1.6% CAGR. We count another 3
mbopd of proposed capacity adds during the same period (or a little
later); but believe these are unlikely to be built, or built on time. Large
capacity additions have historically been delayed, and their impact
has been more spread out. Without immediately worrying about
2013/14, we are encouraged by the lack of capacity growth near term.
After growing 1.2% CAGR over 2004-10, net global refining capacity
growth is expected to slow to 0.7% for 2011/12 (with refining closures
of c.0.6-0.7 mbopd still due). We see refining capacity growth
momentum bottoming around 4Q12, providing a clear run for refiners
to benefit from the ongoing economic recovery, and any improvement
in global oil demand.
Demand strong (but at risk?)
Arguably, the outlook for demand is a little shaky. Coming off
extremely strong growth (3.75% YoY) in 2H10, preliminary data
suggests 1Q11 growth has slowed to 2.3% YoY. Anecdotal evidence
indicates weak gasoline demand in the US; and economic growth
concerns in OECD and China cloud oil demand outlook. Yet, we note
hurdle rates are not high – demand needs to grow only 0.7% CAGR to
outpace net refining capacity creation in 2011/12 (compared to 1.8%
growth between 2000 and 2007). While current high oil prices are a
concern, CS base case oil demand forecasts incorporate a slow
down, and have demand growing 1.5% CAGR 2013-15 from 3% in
2010. Near term, we see upside risks from the much anticipated 2H
economic recovery, continuation of Chinese power shortages and 2H
seasonality
Utilisation rates should continue to improve
On balance, we believe global refining utilisation rates will continue to
improve through 2011/12; with refiners continuing to see an uptrend in
reported margins. A simple regression suggests a 1% increase in
utilisations helps the 6-3-2-1 benchmark margin by US$0.97/bbl. On
base case, we see utilisations increasing from 82.5% in 2010 to
84.1% by 2012. With demand growth most likely driven by Asian,
diesel consumption, complex refiners in Asia can continue to see
higher margins and high operating rates; which should help Asian
refining stocks in the next several quarters. Operating rates can
decline in 2013 but it is perhaps too early to position for a 2013
decline in operating rates.
Which stocks are still cheap?
The late 2010 margin surprises led to large EPS upgrades for most
Asian refiners; stock prices have reacted. On HOLT, some stocks
already imply returns above mid-cycle (for e.g. FPCC in Taiwan).
There are near-term risks – crude price corrections can lead to stock
losses. Yet, the typical seasonal strength in 4Q11/1Q12 can likely
lead to further margin increases, and impact stock prices. We prefer
TOP in Thailand, RIL in India and SK Innovation in Korea on low
relative expectations. S-OIL displayed largest earnings sensitivity last
year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Refining capacity additions in 2011 and 2012 are expected to be
at low rates (at 0.7% CAGR, 1.2% CAGR in 2004-10.) Supply
momentum should bottom around 4Q12. On headline, capacity
growth may pick up in 2013/14 (1.6% CAGR). However, these are
1) several quarters away and 2) as typical, susceptible to delay.
● Oil demand growth has been very strong (up 3.75% YoY) in 2H10.
Macro risks to demand (OECD, China growth concerns) seem to
be increasing, but the ‘capacity’ hurdle rate (0.7%, compared to
1.8% CAGR 2000-07) is not high.
● Continued power shortages in China, strong ‘Other Asia’ and
growing Indian oil demand can provide base for demand growth to
exceed supply growth near term. On base case, we continue to
see refining utilisations improving for at least the next two years.
● Seasonal strength in margins should kick in around 4Q11/1Q12.
Most Asian refining stocks had a good run late last year, with
large EPS upgrades; some already above mid-cycle valuations.
We prefer stocks with low implied expectations – Thai Oil, RIL, SK
Innovation. (Though these may be inexpensive for individual
reasons). Korea’s S-OIL displayed the largest sensitivity to
margins. A fall in crude can lead to stock losses, proving a near
term risk
Slowing capacity momentum
On paper, there is material refining capacity growth in 2013/14 – a
potential 3 mbopd of addition, for 1.6% CAGR. We count another 3
mbopd of proposed capacity adds during the same period (or a little
later); but believe these are unlikely to be built, or built on time. Large
capacity additions have historically been delayed, and their impact
has been more spread out. Without immediately worrying about
2013/14, we are encouraged by the lack of capacity growth near term.
After growing 1.2% CAGR over 2004-10, net global refining capacity
growth is expected to slow to 0.7% for 2011/12 (with refining closures
of c.0.6-0.7 mbopd still due). We see refining capacity growth
momentum bottoming around 4Q12, providing a clear run for refiners
to benefit from the ongoing economic recovery, and any improvement
in global oil demand.
Demand strong (but at risk?)
Arguably, the outlook for demand is a little shaky. Coming off
extremely strong growth (3.75% YoY) in 2H10, preliminary data
suggests 1Q11 growth has slowed to 2.3% YoY. Anecdotal evidence
indicates weak gasoline demand in the US; and economic growth
concerns in OECD and China cloud oil demand outlook. Yet, we note
hurdle rates are not high – demand needs to grow only 0.7% CAGR to
outpace net refining capacity creation in 2011/12 (compared to 1.8%
growth between 2000 and 2007). While current high oil prices are a
concern, CS base case oil demand forecasts incorporate a slow
down, and have demand growing 1.5% CAGR 2013-15 from 3% in
2010. Near term, we see upside risks from the much anticipated 2H
economic recovery, continuation of Chinese power shortages and 2H
seasonality
Utilisation rates should continue to improve
On balance, we believe global refining utilisation rates will continue to
improve through 2011/12; with refiners continuing to see an uptrend in
reported margins. A simple regression suggests a 1% increase in
utilisations helps the 6-3-2-1 benchmark margin by US$0.97/bbl. On
base case, we see utilisations increasing from 82.5% in 2010 to
84.1% by 2012. With demand growth most likely driven by Asian,
diesel consumption, complex refiners in Asia can continue to see
higher margins and high operating rates; which should help Asian
refining stocks in the next several quarters. Operating rates can
decline in 2013 but it is perhaps too early to position for a 2013
decline in operating rates.
Which stocks are still cheap?
The late 2010 margin surprises led to large EPS upgrades for most
Asian refiners; stock prices have reacted. On HOLT, some stocks
already imply returns above mid-cycle (for e.g. FPCC in Taiwan).
There are near-term risks – crude price corrections can lead to stock
losses. Yet, the typical seasonal strength in 4Q11/1Q12 can likely
lead to further margin increases, and impact stock prices. We prefer
TOP in Thailand, RIL in India and SK Innovation in Korea on low
relative expectations. S-OIL displayed largest earnings sensitivity last
year.
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