Macquarie Research, Asian downstream oil - Playing through the rough

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Asian downstream oil
Playing through the rough
A mid-cycle slowdown
After reviewing our downstream fundamentals and stock valuations, we conclude
we are only at the mid point of the current refining up-cycle despite the increased
risks and continuing volatility surrounding the sector. 1H11 volatility in Asian
downstream equities was hardly a surprise, with disappointing year-to-date
western oil demand, mixed global macro indicators and soft regional demand in
April, but we still believe higher-than-expected margins should trigger earnings
revisions for downstream equities.
Our preferred names in the Asian downstream space:
􀂃 Preferred refiner in Korea: GS Holdings
􀂃 Preferred refiner in Thailand: Thai Oil
􀂃 Preferred refiner in India: Hindustan Petroleum
Margins: lifting our estimates across the board
At US$8.1/bbl, year-to-date Asian complex refining margins have been
exceptionally strong. We attribute that strength to very high utilization rates and
support from a series of extraordinary events, including the earthquake in Japan,
unrest in the Middle East and Chinese regulatory policy. While seasonality points
to lower HoH margins, we expect higher-than-expected margins to continue to
trigger earnings revisions for downstream equities.
Demand is volatile, a return to trend projected for Asia
The recent weakness in North Asian demand will reverse into the summer. We
note that the EIA, the IEA and OPEC have all recently raised their demand
growth projections for Asia for 2011. Our look at bottom-up Asian indicators such
as bunker fuel sales, air transit and port volumes are also supportive.
Asian supply will remain relatively tight
Following our update of regional capacity projects, we have raised our 2011
capacity estimate. The 700m b/d in Asia and the Middle East still falls well short
of our 1.4mm b/d of expected demand growth. Importantly, while Asian
inventories are above historical ranges, OECD inventories appear to be
adequate against strong year-end demand.
More upside risks than downside
The recent decision to sell down IEA stocks does not look like a sustainable
threat to margins. Some sort of resolution to the Libyan crisis should also
eventually help reduce record oil differentials. However, the downside risk to
differentials and margins appears limited. That is weighed against electricity
shortages from China, a seasonal ramp-up in Japanese demand following
damages to its electricity grid, and the recent targeting of refineries by Al-Qaeda
in Iraq.