Goldman Sachs:: Oil - Refining :: Slower demand and project delays; cut ‘12E margins but raise ‘13E

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Oil - Refining
Equity Research
Slower demand and project delays; cut ‘12E margins but raise ‘13E
Lower demand but lower supply forecasts; weak 2012E to be
followed by a better 2013E as refining cycle extends by a year
Our updated global refining model reflects inter-play of lower oil demand
forecasts for 2011E-12E and supply side changes with some projects for
2011E-13E running behind schedule. We find these delays offsetting a part
of the demand weakness. Overall, utilisation rate has weakened for 2012E
vs. earlier but improved for 2013E, with the cycle going down in 2014E.
Lower oil demand growth forecasts in line with lower GDP growth
Our lower oil demand growth forecasts of 1.0 mn b/d for 2011E and 1.3 mn
b/d for 2012E, vs. 1.7/1.6 mn b/d for 2011E/12E earlier, reflect a weaker
economic outlook for the OECD countries, particularly the US, with stable
emerging market demand. Given the global nature of products trade and
Asia being a net exporter to the west, we believe it is unlikely for Asian
refining margin to completely ignore the global utilisation trends.
Project delays could play a key role in supporting the refining cycle
While demand weakness would be a concern, we believe slippage in new
projects is becoming common and is likely to support the refining cycle till
2013E. We find more than half of about 750 K b/d of capacity delays each
for ’11E-‘12E are in Asia, owing to logistics, delays in acquiring land,
obtaining clearances/permits and some tightness in engineering chain.
This effectively delays the end of the current cycle to 2014E, in our view.
Reduce ‘12E margins, push up ‘13E; 12E cracks now below 11E
level; Formosa scheduled to return in 4Q11; some from Japan too
In line with changes in utilisation rates, we have cut our product crack and
margin forecasts for 2012E, while pushing them up for 2013E. We have
nudged up 2011E forecasts slightly. We expect cracks to correct in 4Q11E
as Formosa’s 540K b/d capacity comes back and also expect about 300K
b/d of time-weighted capacity in Japan to come back in 2012E. However,
we believe extension of the refining cycle till 2013E potentially leading to
higher multiples for 2012E and some price correction have improved riskreward for some of the Asian refinery stocks, at current valuations.
HPCL, SK Innovation are top picks; Neutral on RIL, Sell on Thai Oil
HPCL (Conviction Buy) and SK Innovation are top picks. Keep Neutral on
RIL and reiterate Sell on Thai Oil. Weak demand, capacity delays are risks.