Wednesday, February 8, 2012

>Mothballing, capacity delays to lead refinery recovery and upcycle over medium term; Asian refiners key beneficiaries of higher cracks

Closures, project delays, demand outlook to drive upcycle in ’12-13E

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.

To read the full report: Global: Energy: Oil - Refining