Refiners on a high

This article first appeared in The Edge Financial Daily, on August 7, 2017.
-A +A

KUALA LUMPUR: Last week, the Brent crude oil price rebounded to over US$50 (RM214) per barrel for the first time in two months, partly thanks to a drawdown in the US crude inventories, coupled with the threat of sanctions against Opec member Venezuela.

Interestingly, the news did not put a lid on the share price rally in Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Co Bhd as higher crude prices mean more costly feedstocks for them.

Instead, the two stocks climbed further last week.

Petron’s shares surged to an all-time high of RM9.76 last Friday, while Hengyuan soared to a 42-month high of RM7.97. Both counters were in the top five gainers of Bursa Malaysia last Friday.

Year to date, Hengyuan’s, which was slammed by Bursa on “unusual market activity” two weeks ago, share price has gained an impressive 293%, in the same period, Petron has gone up 135%.

The two counters may yet see a limit to its seven-month rally simply because they are trading at single-digit price-earnings ratio (PER). Based on last Friday’s closing, Hengyuan and Petron are currently trading at 4.66 times and eight times respectively trailing 12-month PER.

In Malaysia, Petron is an oil refiner with 11 terminals and 580 gas stations, while Hengyuan, formerly known as Shell Refining Co Bhd, operates the second-largest oil refinery in Malaysia.

For refiners, the drop on crude oil prices are good. Low crude prices will help to widen their profit margin.

To some extent, low prices will also increase sales volume for retailers, namely petrol stations, whose margins are fixed through the automated pricing mechanism set by the government.

Hong Leong Investment Bank research analyst Aaron Tan said that despite the rebound on Brent crudes, prices have remained relatively low — it is still halfway down from the high at US$100 per barrel back in 2013.

“We have to admit that we are currently at a low oil price period, so margins for refiners are still at a good level,” Tan told The Edge Financial Daily.

Tan added that even as low oil prices benefit downstream companies, oil and gas players in general put a higher importance on price stability, as it makes it easier to work out the operating cost without being concerned about volatility in selling price and market sentiment.

“A rebound may be seen as a signal that [the] oil price is still stable compared with the past two years, despite some movement between March and August this year,” he added.

Another analyst puts similar weight on stable crude prices. “[Refiners’] Profit has improved in fourth quarter (4Q) last year and in the 1Q of this year as well, even when prices were higher than in the first half of 2016,” he said.

During both 4Q financial year 2016 (4QFY16) and 1QFY17, Petron Malaysia’s net profit grew over fivefold year-on-year (y-o-y). Similarly, Hengyuan’s net profit more than doubled y-o-y in the same period.

In 1QFY17, Petron’s net profit jumped 553.3% to RM108.54 million from RM16.61 million in the same quarter last year, on improved margins and sales volume, combined with higher operating efficiencies. Revenue stood at RM2.56 billion, up 39.76% from RM1.66 billion a year ago.

Hengyuan’s net profit in 1QFY17 ballooned 175% to RM279.49 million from RM101.65 million, citing higher average product prices as the main fuel to the strong earnings growth. Revenue expanded nearly 57% to RM2.93 billion, from RM1.87 billion in 1QFY16. However, dividend-wise, analysts do not see the two refiners as dividend stocks.

Hengyuan, for one, has not declared any dividend since 2013. However, Petron has a five-year average annual yield of 3.75%, with an average dividend of 14 sen per share between June 2013 and June 2017.

From a refiner’s perspective, any upside on earnings will still be tied to oil price movement — Petron and Hengyuan rebounded in FY15 after two consecutive loss-making years in FY13 and FY14, when their margins was dragged by Brent crude prices at US$100 per barrel.

Hengyuan has not indicated any interesting prospects for growth apart from cost management and operating efficiency. Meanwhile, Petron said in its FY16 annual report that it is “picking up the pace on its service station network expansion”. Being the third-largest retailer in Malaysia, it can further benefit from improving consumer sentiment as well.

Market expectation has it that the crude prices to average between US$50 and US$60 per barrel for the rest of 2017. As it is, Opec is adamant not to let it slide any lower. But as downward pressure persists from global oversupply, investors can be on the lookout of the two counters, at least until the end of the year, perhaps.