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Global: Energy: Oil - Refining
Equity Research
Closures, project delays, demand outlook to drive upcycle in ’12-13E
Mothballing, capacity delays to lead refinery recovery and upcycle
over medium term; Asian refiners key beneficiaries of higher cracks
While the market focuses on weak 4QCY11 results of refiners, we believe
the global refining cycle is now heading for recovery and upcycle during
2012E-13E driven by 1) major mothballing of refineries in US/ Europe, 2)
delays in new projects, 3) oil demand recovery from 2H12E. We also note
there is only limited capacity addition after 2Q12E. Overall, global
utilisation has moved up for all years: 2012E-14E. We believe the Asian
refiners would be key beneficiaries of rising cracks while US/Europe
refiners are plays on WTI-LLS and light-heavy oil spreads.
Supply side reaction to weak margins has picked up in US/Europe
We have witnessed announcements of mothballing of about 1.2 mb/d of
refining capacity since Sep ‘11, of which 1.1 mb/d will take place until July
2012. In addition to this, we believe about 2.4 mn b/d of refining capacity in
the western hemisphere remains under strategic review. This represents
about two years of normalised oil demand growth globally.
Delay in new projects to support refining cycle over medium term
Moreover, we believe delays in new projects have become a central theme
in the refining sector driven by delays in logistics, delays in acquiring land,
obtaining clearances/permits and some tightness in engineering chain. We
find more than half of the 1.5 mb/d likely delays for 2012E are in Asia.
Raise Singapore cracks for 2H12E-2013E, normalised 2014E margin
in line with oil forecasts; upgrade Asia refining stance to Attractive
We raise our Singapore cracks forecasts for 2012E-13E by 20% and
upgrade our refining sector stance to Attractive from Neutral. China will
continue to have tight distillate supply over the medium term, in our view.
S-Oil, Thai Oil, RIL and Western are our favorite refiners
In Asia we upgrade S-Oil to Buy (CL), Thai Oil, RIL and GS Holdings to Buy,
Caltex to Neutral; in US, Western Refining (CL), HollyFrontier, and CVR Energy
remain our Buy-rated favorites. In Europe, we prefer the oil producers within
the refining/integrated sector: RD Shell and BG (both CL Buy). Key risks: 1)
Demand slowdown from weak macro, 2) oil price spike from low spare
capacity in 2013E, 3) supply crunch from Iran tension escalation.
Reliance Industries (RELI.BO, Buy, 12-month price target Rs 970)
Investment view: We upgrade Reliance Industries (RIL) to Buy from Neutral as we believe
that an upcycle in refining will lift margins and is likely to drive an earnings surprise for RIL
over the medium term, by offsetting lackluster E&P performance. We now forecast the
refining cycle to be robust over 2HCY12E-CY13E driven by significant closures in
US/Europe, delays in new projects and recovering oil demand. While D-6 ramp-up is
unlikely till FY15E, we believe there could be positive updates from RIL’s shale and
broadband ventures in FY13E. Moreover, any update on value-accretive inorganic growth
in existing lines of business could re-rate RIL stock, in our view.
Valuation: We revise our 12-m, SOTP based, TP to Rs 970 (from Rs 960) implying an
upside of 17%. We raise FY13E-14E EPS by 9-13% to reflect higher margins and weaker
INR-USD.
Key risks: 1) Low refining margin; 2) weak petchem margin; 3) expensive acquisitions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global: Energy: Oil - Refining
Equity Research
Closures, project delays, demand outlook to drive upcycle in ’12-13E
Mothballing, capacity delays to lead refinery recovery and upcycle
over medium term; Asian refiners key beneficiaries of higher cracks
While the market focuses on weak 4QCY11 results of refiners, we believe
the global refining cycle is now heading for recovery and upcycle during
2012E-13E driven by 1) major mothballing of refineries in US/ Europe, 2)
delays in new projects, 3) oil demand recovery from 2H12E. We also note
there is only limited capacity addition after 2Q12E. Overall, global
utilisation has moved up for all years: 2012E-14E. We believe the Asian
refiners would be key beneficiaries of rising cracks while US/Europe
refiners are plays on WTI-LLS and light-heavy oil spreads.
Supply side reaction to weak margins has picked up in US/Europe
We have witnessed announcements of mothballing of about 1.2 mb/d of
refining capacity since Sep ‘11, of which 1.1 mb/d will take place until July
2012. In addition to this, we believe about 2.4 mn b/d of refining capacity in
the western hemisphere remains under strategic review. This represents
about two years of normalised oil demand growth globally.
Delay in new projects to support refining cycle over medium term
Moreover, we believe delays in new projects have become a central theme
in the refining sector driven by delays in logistics, delays in acquiring land,
obtaining clearances/permits and some tightness in engineering chain. We
find more than half of the 1.5 mb/d likely delays for 2012E are in Asia.
Raise Singapore cracks for 2H12E-2013E, normalised 2014E margin
in line with oil forecasts; upgrade Asia refining stance to Attractive
We raise our Singapore cracks forecasts for 2012E-13E by 20% and
upgrade our refining sector stance to Attractive from Neutral. China will
continue to have tight distillate supply over the medium term, in our view.
S-Oil, Thai Oil, RIL and Western are our favorite refiners
In Asia we upgrade S-Oil to Buy (CL), Thai Oil, RIL and GS Holdings to Buy,
Caltex to Neutral; in US, Western Refining (CL), HollyFrontier, and CVR Energy
remain our Buy-rated favorites. In Europe, we prefer the oil producers within
the refining/integrated sector: RD Shell and BG (both CL Buy). Key risks: 1)
Demand slowdown from weak macro, 2) oil price spike from low spare
capacity in 2013E, 3) supply crunch from Iran tension escalation.
Reliance Industries (RELI.BO, Buy, 12-month price target Rs 970)
Investment view: We upgrade Reliance Industries (RIL) to Buy from Neutral as we believe
that an upcycle in refining will lift margins and is likely to drive an earnings surprise for RIL
over the medium term, by offsetting lackluster E&P performance. We now forecast the
refining cycle to be robust over 2HCY12E-CY13E driven by significant closures in
US/Europe, delays in new projects and recovering oil demand. While D-6 ramp-up is
unlikely till FY15E, we believe there could be positive updates from RIL’s shale and
broadband ventures in FY13E. Moreover, any update on value-accretive inorganic growth
in existing lines of business could re-rate RIL stock, in our view.
Valuation: We revise our 12-m, SOTP based, TP to Rs 970 (from Rs 960) implying an
upside of 17%. We raise FY13E-14E EPS by 9-13% to reflect higher margins and weaker
INR-USD.
Key risks: 1) Low refining margin; 2) weak petchem margin; 3) expensive acquisitions.
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