Monday, 15 May 2017

PETROL refiners and distributors benefit from volatile oil prices

PETROL refiners and distributors have been one of the bright sparks on Bursa Malaysia in recent weeks.

Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Company Bhd (previously known as Shell Refining Company (Federation Of Malaya) Bhd, for example,have seen their shares rise by over 100% since the beginning of the year.

The market is of the impression that downstream players could benefit from a lower oil price environment as it can help stimulate demand growth and raise the sales of their products.

These companies have also benefitted from the oil price environment today which is not too high nor too low and prices have recovered when compared to the same quarter of the previous year.

“We have seen oil prices recovering now and this gives a strong year-on-year boost to these downstream operators for the first quarter of this year, including the refineries and petrochemical players,” RHB’s Bangkok based head of regional oil and gas, Kannika Siamwalla.

Other than Petron and Hengyuan, Petronas Dagangan Bhd also operates within this space of the oil and gas industry.

Kannika says refineries in Asia-Pacific had generally seen a strong first quarter and this is mostly within expectations after stripping out the effects of foreign exchange.

“I believe demand will outstrip supply this year in the Asia-Pacific region while gross refining margins should be strong, about a dollar higher than the fourth quarter last year,” she says.

She says that there could be a “slight dip” in terms of refined product spread in the second quarter due to seasonally low demand and coming from a high base in the first quarter.

“The second quarter will be much softer.

Plus China has already built up its inventory of benzine and paraxylene.

“Towards the end of the second quarter to the whole of third quarter we would see demand picking up once again due to the driving and travel season coming in.

“While in the fourth quarter it will further pick up due to the winter season with oil demand anticipated to pick up,” Kannika says.

Note that Malaysian petroleum refineries typically only produce petrol and not petrochemical products.

The latter is produced by Petroliam Nasional Bhd (Petronas) through Bursa-listed Petronas Chemicals Group Bhd.

In line with the region, petroleum refiners in Malaysia also take the Mean of Platts Singapore (MOPS) to price petrol to the end user.

Players in the petrochemicals space can either have their own negotiations with their clients but Kannika notes that most companies will use regional prices as the benchmark.

“It can be at a discount or a premium to these benchmark prices depending on how they negotiate,” she says.

For the Malaysian petrol market, MIDF Research’s analyst Aaron Tan says that the recently employed weekly change to petrol prices could be positive or negative to some refineries.

Tan who covers PetDag says that it could benefit from the price difference.

“The inventory holding period for PetDag is now reduced to less than five days and the weekly petrol pump pricing mechanism will not have a negative impact on PetDag. It could be positive but not negative,” he says.

In his report on March 23, he says that the weekly price float shortens the exposure time of petrol dealers to MOPS prices and would mean that the likelihood of PetDag experiencing lag loss due to steep declines in crude oil/MOPS prices be reduced.

The report saw PetDag being upgraded to a “buy” from “neutral” with an unchanged target price of RM26.91.

MIDF says PetDag’s valuation is premised on a price to earnings ratio for 2017 of 28 times pegged to an earnings per share of 96.1 sen, based on its average four-quarter rolling PER over the past five years.

Meanwhile, share prices for all three listed refiners have been on an uptrend with the ones that aren’t covered by the investment community seeing stronger performance in percentage gains.

Both Petron and Hengyuan have been their share prices moving up strongly and have registered year-to-date gains of 104% and 109% respectively.

Petron in its latest published annual report 2016 showed that it had reported a second consecutive year (financial year ended Dec 31) of profit after two consecutive years of losses in FY13 and FY14.

Its latest fourth quarter results saw its revenues rising by some 21% to RM2.29bil from RM1.88bil in the same quarter a year ago while net profit surged almost seven times to RM112.62mil.

Petron attributed the improved revenue to the increase in oil prices and sales volume while net profits were buoyed by the growth in sales volumes and better operating efficiencies.

The company however highlights in its annual report that in the bigger picture, product cracks which are the price differential between crude oil and finished products continued to narrow last year and that these have had an impact on its business.

Petron says that despite these headwinds; it reported an overall stronger year in 2016 due to an expansion in its presence, introducing innovative products and services and strengthened its logistics capabilities.

For Hengyuan, the company is moving forward after the switch in majority shareholder ownership from Shell Overseas Holdings Ltd to Malaysia Hengyuan International Limited (MHIL) in early 2016.

MHIL is an indirect unit of China’s state owned Shandong Hengyuan Petrochemical Group Company Ltd (SHPC) based in Shandong Province.

Hengyuan also recorded a second consecutive year of net profit in FY16 away from three prior years of losses in FY12 to FY14.

Similar to Petron, Hengyuan also notes that product cracks have weakened in 2016 and that had impacted its profit and revenue performance in FY16.

“Gross profit margin was at 10%, comparable to that of 2015, amidst lower revenue, primarily due to stockholding gains of US$1.40 per barrel equivalent to RM188mil, as the average crude and product prices saw a gradual recovery from US$47 per barrel (at the end of 2015) to US$61 per barrel (at the end of 2016),” the company says.

Hengyuan also notes that it is exploring the use of hedging to protect its refining margins.

Meanwhile, Hengyuan’s main focus moving forward however will be the planned implementation of the Euro 4M compliance in October 2018 which will require plant upgrades.

It notes that this is a crucial project to ensure the sustainability of the business and to meet the industry’s future requirements.

The company says that the final investment decision for the project will be presented to the board in the second quarter of the year, with the aim of completing construction in the second half of 2018.