Goldman Sachs
Reliance-BUY
PO Rs 970
Mothballing, capacity delays to lead refinery recovery and upcycle over medium term; Asian refiners key beneficiaries of higher cracks
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).
capacity in 2013E, 3) supply crunch from Iran tension escalation.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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