Refinery stocks facing further price decline

Based on next year's earnings, the target prices could be cut 16-30 per cent, and further risks involve additional government intervention, oil-price volatility, sharp fluctuations in refining margins and delays to new projects, the firm said.

"We believe the sharp decline in oil prices could put more pressure on refineries' margins in the third quarter, due to huge stock losses. This should exceed their stock gain booked in the second quarter, as the oil price has declined US$50 (Bt1,700) per barrel from the end of the quarter," it said.

The securities house said listed oil-refinery companies had been hit continuously since the beginning of the year by negative news and market expectations of the impact of new refineries in China and India. Their share prices have declined 30-48 per cent in the past six months, with IRPC the worst performer during the period.

The recent pressure emerges as financial turmoil in the United States could drag down global economic growth and demand for refined oil products.

"Although we believe these refineries are traded at a deep discount, investor sentiment is unlikely to recover soon," it said.

The gross refining margin has declined to $5.20 a barrel so far in the third quarter, from $8.20 in the second quarter. The margin improved to double-digit figures recently, thanks to shutdowns of refineries in the US to minimise damage from seasonal hurricanes. Also, Reliance shut down one of its refineries, due to problems with a fluidised catalytic cracking unit late last month.

This should have only a short-term effect that could ease in the fourth quarter, while that of a slowdown in demand and higher refining capacity is around the corner. The new Reliance Jamnagar refinery, with a capacity of 580,000 barrels per day, will begin operating in a few weeks.