Margins of refiners, petrochemical companies seen improving

Affun Hwang Research has downgraded the counter from a

PETALING JAYA: The margins of refiners and petrochemical companies are expected to improve as the current rise in crude oil prices is deemed to be temporary, according to a report by JP Morgan Chase & Co.

The report noted that as oil prices weaken, refining margins will improve even though US refiners hit by Hurricane Harvey have been coming back online. This, in turn, has affected product prices and crack spreads, which have retreated.

Last week, Brent crude oil touched US$56.40 a barrel, nearly a six-month high as traders looked to a production cut agreement led by the Organisation of the Petroleum Exporting Countries to further tighten global supplies.

However, JP Morgan expects the rally in Brent crude to be temporary and prices to normalise.

“This should act as a positive tailwind for refining margins as oil prices normalise,” it said in a recent report.

It added that gross refining margins were still higher than pre-Hurricane Harvey, although US refining capacity has been steadily rising on higher crude prices.

US-based refineries have been restarting their operations after Hurricane Harvey, which forced them to shut down for two weeks.

In the Asean region, JP Morgan still prefers Bursa Malaysia-listed Lotte Chemical Titan Holding Bhd among the region’s petroleum chemical players.

“We continue to reiterate our preference for Lotte Chemical within the Asean petroleum chemical space.

“We see the current environment benefitting all petroleum chemical names. However, we prefer Lotte Chemical due to a likely strong quarter-on-quarter performance and cheap valuations,” it said, adding that within Asean refining, the research house preferred Filipino refiners, given an underperformance relative to Thai refiners.

Lotte Chemical had two incidents that were disruptive of production in the past year, but analysts played down the most recent one, saying that the impact on production would be minimal.

Last week, Lotte Chemical shares were hit when news trickled in of a fire at one of its plants.

The company’s share price went as low as RM5.04 a share, but later improved to RM5.25 at Thursday’s close.

Lotte Chemical’s first incident, which occurred in April, saw the company’s net profit taking a hit, plunging 72% to RM113.62mil from a year ago.

The other listed petrochemical firm on Bursa Malaysia, Petronas Chemicals Group Bhd (PetChem), has seen its share price rising 10.90% to RM7.47 on Sept 11 from its recent low in mid-July.

JP Morgan expects PetChem to benefit from high methanol and urea prices, currently trading at six-month highs. PetChem has a 2.6-million-tonne capacity for urea and 2.4 million tonnes for methanol.

The company’s shares closed at RM7.30 last Thursday.

Bursa Malaysia also has two listed refiners, Hengyuan Refining Co Bhd and Petron Malaysia Refining & Marketing Bhd, besides state-owned Petroliam Nasional Bhd, which owns three oil refineries in Malaysia.