Refiners lose favour in margin squeeze

Several brokerage houses last week recommend investors temporarily avoid PTT Aromatics and Refining (PTTAR), IRPC, Bangchak Petroleum (BCP) and Thai Oil, because the Energy Ministry might ask them to lower their diesel refining margin, which could affect their profits.

They said investors could wait until the matter became clearer this Friday.

Vajiralux Sanglerdsillapachai, an analyst from Trinity Securities, said there were two methods to cut the refining margin of diesel. The government may require refining firms to squeeze oil prices but this could impact on their revenues.

The second way is for the government to subsidise oil prices by cutting tax on petrol stations to lower fuel costs. She said the first method would have a negative effect on refining companies because the firms had to purchase oil according global oil trades but could not adjust selling prices in the local market.

At present, refining firms must sell liquefied petroleum gas (LPG) at prices lower than the global level.

Local LPG sells for US$315 (Bt10,100) per tonne, while the global price is $830 per tonne.

LPG accounts for 5-7 per cent of the sales volumes of refining firms.

"Diesel accounts for 51-55 per cent of total oil production of all refining plants. If the refiners must shoulder diesel prices, it will result in a lower refining margin. If the government chooses to force them to squeeze diesel price, the impact will affect PTT, as well," she said.

Citi Investment Research said the four refining firms, which are PTT subsidiaries, are unlikely to sacrifice their margins unless their rivals - Esso (Thailand) and Star Petroleum Refining - agree to do the same.

Every $1-a-barrel cut in the gross refining margin may lead to a 20-25-per-cent reduction in earnings, it said.

Fitch Ratings said PTTAR's earnings may drop between now and next year, because its margins were squeezed.

Citi Investment Research said the refiners would make a small contribution to help a few groups of diesel users, similar to the Hurricane Katrina situation in 2005, when Thai Oil contributed about Bt300 million to help diesel users.

Citi maintains its "buy" recommendation on Thai Oil, with a low risk rating.

KGI Securities said intervention from the government by asking refiners to cut their refining margin may have a negative psychological effect for the investment in this segment but only for a short-term period.

"Although we expect a little impact from this factor, we recommend investors avoid trading the segment," he said.

Some investors offloaded shares in these companies yesterday.

Thai Oil yesterday closed at Bt62.50, easing 7.41 per cent from last week.

PTTAR closed Bt28.25, down 5.04 per cent from its previous close.

 IRPC closed at Bt5.10, down 7.27 per cent.

BCP closed Bt12.60 per share, a 2.33-per-cent drop from yesterday's trading.