Thai Oil:3QFY15earnings under oil stock and FX losses pressure

3QFY15 earnings likely under refinery and aromatics headwinds

    We expect TOP to deliver net loss of Bt2,376mn in 3QFY15, compared to net profit Bt6,228mnin the prior quarter. Capacity utilization rates in its refinery, aromatics, and lubricant is likely tostay level q-q at 107%, 85%, and 88%, and TOP is likely to record cBt577mn hedging gains ofpetroleum spread, which appear to be not enough to mitigate impact from weaker GRM andoil stock losses in refinery and the narrower aromatics spreads, as well as FX losses estimatingat Bt2,575mn for its USD-denominated loans due to the weaker baht.

    Refinery’s operating performance faced two major headwinds in 3QFY15. Market GRMappears to weaken from the prior-quarter US$7.4/barrel to US$6.4 but the pace of declinesseems moderate as the lower costs of premium crude feedstock, fuel and feedstock logisticsare likely to mitigate impact from the narrower spreads--diesel-DB spread narrowed by US$3to US$10.8/barrel due to sluggish demand in the regional market and higher diesel exportsfrom China, and ULG95-DB spread contracted by US$0.4 to US$19.4/barrel as demand fadedafter the fasting in the month of Ramadan came to an end. Moreover, TOP is likely to suffer oilstock losses and NRV of cUS$5.0/barrel (approximately Bt4,830mn), compared to the secondquarteroil stock gains and NRV of US$2.7/barrel (cBt2,414mn), as Dubai crude price droppedby US$17/barrel to Us$46.4 in September due to a surge in US crude inventories, the strongerUS dollar, and concerns about Chinese slowdown, while the weakening baht seeminglynarrowed down the losses by US$1/barrel.

    In aromatics business, operating performance was pressured by the narrower spreads. PXULG95spread fell 5% q-q to US$233/ton and that of BZ-ULG95 dropped 34% to US$76 due towaned demand in China, which could drag its P2F down from the prior-quarter US$76/ton toUS$57.

    4QFY15 earnings seen improvement, FY16 outlook bright on full-year operations of LAB, SPPThe final-quarter earnings are likely to improve and we do not expect TOP to suffer oil stock andFX losses, like the third quarter. Spreads of jet-DB and diesel-DB are likely to widen, and with a60% of TOP’s total distillate production, should help boost GRM in 4QFY15.。

    The startups of its annual 100k ton-capacity LAB facility and the 239MW of SPP power plant in2QFY16 should drive earnings higher in 2016 while GRM will likely under pressure from newsupply from the Middle East. Based on TOP’s 75% equity, a full-year operation of LAB facility willgenerate profit cBt239mn, assuming spread of LAB-BZ at US$699/ton and LAB-Kero ofUS$526/ton that will generate P2F of US$109/ton. The wholly-owned SPP power plant wouldgenerate cBt964mn on a full-year power generation.

    ‘BUY’ rating with target price of Bt67/share

    Despite subdued outlook for 3QFY15, the fourth-quarter earnings are expected to see a notableimprovement. We reiterate TOP shares a ‘BUY’ rating with target price of Bt67/share.