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Thai Oil's Q1 Results Affected By Weaker Product Spreads

Performance expected to remain weak in 2014 but credit metrics still within tolerance level Weak Q1 performance.

Thai Oil's adjusted EBITDA declined by 20% in Q1 2014 compared to Q1 2013, despite a 7% revenue increase in the same period. This was largely attributable to a decline in contributions from its two key business segments -- 82.2% in aromatics and 25.3% in refining -- which together accounted for 62% of the company's EBITDA for Q1 2014.

Lower margins in the aromatics segment was the key driver for weak performance. The aromatics business, which accounted for 7% of EBITDA for the quarter compared to 32.1% a year ago, was affected by a decline in product spreads. The product to feed margin for Thai Oil's aromatic products declined to $63 per ton in the quarter, from $165 per ton in Q4 2013 and $155 per ton in the previous year. In particular, the spread between paraxylene and unleaded gasoline fell substantially to $273 per ton in the quarter from $559 per ton in the same period last year.

The margin contraction resulted from an oversupply of paraxylene in Asia as new aromatic plants with total capacity of 1.3 million tons per year commenced operations in China and Saudi Arabia. Moreover, lower paraxylene demand from PTA plants in the region exacerbated the margin.

We expect the spreads in the aromatics segment to remain weak in 2014 as the capacity additions continue to outpace demand growth for paraxylene.

Refining segment affected by softer product crack spreads. Accounting for 55.1% of EBITDA for Q1 2014, Thai Oil's refining segment remains its largest business segment. Weaker product crack spreads across middle distillates, which contribute more than 50% of Thai Oil's product slate, led to lower segment profitability. While its utilization rate improved to 105% and segment revenue grew by 7%, the market gross refining margin fell to $5.1 per barrel in the quarter from $6.6 per barrel in the same period last year.

We expect the regional refining margins to remain in line with levels in 2013 as the net capacity additions in 2014 will not materially exceed the demand growth in the region.

Higher margins boost earnings for lube base oil segment. Thai Oil's lube base oil segment, which accounted for 17.9% of EBITDA, posted strong results on the back of higher margins. The product to feed spread improved to $135 per ton for the quarter from $118 per ton in the same period last year, due to scheduled maintenance shutdowns of regional refineries. Earnings were also boosted by the utilization rate, which improved to 100percent for the quarter from 97% a year ago.

We expect lube base oil margins to weaken for the rest of the year, in line with an increase in regional supply after the maintenance season, and lower demand for lube oil after the engine lubricant replacement season in April.

Weaker credit metrics remain within tolerance level. Thai Oil's credit metrics have weakened. Its debt-to-EBITDA was at 3.6x for the 12 months ended 31 March 2014, compared to 3.3x for FY2013. Nevertheless, the deterioration has no impact on its ratings, as its financial metrics remain within our tolerance level. At the same time, its strong liquidity profile, as demonstrated by its large cash and cash equivalents totaling THB50.0 billion, provides the company with financial flexibility.

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