Energy
A devil's trap
We continue to Underweight the sector. It appears we were too pessimistic in
assuming trough valuations and have now adjusted our estimates to reflect
higher expectations for 1H09 and improved market sentiment. However, we
expect new capacity in 3Q09 to trigger a big sell-off in downstream stocks.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
PTT Aromatics¹ PTTAR.BK Dec 2009 Sell B19.00 B15.55 0.79 24.20
PTT Chemical¹ PTTC.BK Dec 2009 Buy B49.50 B68.00 5.57 8.9
PTTEP¹ PTTE.BK Dec 2009 Buy B120.00 B161.00 7.81 15.40
PTT¹ PTT.BK Dec 2009 Sell B210.00 B189.00 16.30 12.90
Thai Oil¹ TOP.BK Dec 2009 Sell B39.50 B27.50 2.96 13.30
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items.
Priced at close of business 26 May 2009.
Source: Company data, ABN AMRO forecasts
Why the sudden love?
Share prices of Thai oil and gas and petrochemical companies have risen substantially over
the past three months. We believe this was fuelled by: 1) increased appetite for risk; 2) a
recovery in product prices and spreads; 3) expectations of a recovery in 1Q09 earnings from
the lows of 4Q08; and 4) the CEO’s discussion of a possible merger between PTT
subsidiaries in an interview with local newspapers.
Industry outlook is just as poor as it was three months ago
The outlook for petrochemical and refining businesses remains the same as it was three
months ago. True, some of the capacity addition has been delayed and so 1H09 earnings
should beat our estimates, but the delay is only by three or four months. We expect new
capacity to kick in from 3Q09, followed by a sharp decline in margins, which should trigger
across-the-board selling of refining and petrochemical-related stocks.
We retain our bearish stance: start-up of new capacity in 3Q09F should trigger selling
We expect the recent trend of strong spreads to persist through 1H09, but are doubtful about
prospects beyond that, as new capacity hits the market. We have increased our earnings
estimates across the board for Thai oil and gas companies to reflect a strong 1H09F, and we
note that trough valuations may no longer be warranted, considering the improved sentiment
and investor appetite for risk. However, we remain Underweight on the sector with PTTAR as
our top Sell idea, followed by PTT and TOP. We remain extremely bearish on the refining
and petrochemical sectors and believe the start-up of new capacity, possibly by 3Q09, will
likely trigger a significant sell-off in these three stocks. On the Buy side, we like PTTEP,
given our strong 2010 earnings outlook for the company. PTTCH is our second pick, as we
foresee a strong recovery in its earnings after the start-up of its new olefin cracker by yearend
2009.
Contents
Sentiment vs fundamentals 3
Share prices of Thai oil and gas and petrochemical and refining companies have
risen substantially over the past three months. Sentiment may have turned
optimistic, but we think the underlying sector fundamentals are as bearish as they
were three months ago.
3
Sector snapshot: Bearish outlook with short-term upside 7
Risks 24
Market leaders; most liquid and are the big caps 24
Delays or cancellation of new capacity 24
Company profiles 25
PTT Aromatics & Refining 26
PTT Chemical Pcl 31
PTT Pcl 36
PTT E&P 40
Thai Oil 45
2