Petron’s valuation in line with peers

The firm’s earnings is highly susceptible to the fluctuations of crack spreads

PETRON Malaysia Refining & Marketing Bhd (PETRONM) is part of the larger Petron Corp (head-quartered in the Philippines), which entered Malaysia back in 2012 after acquiring ExxonMobil’s downstream business. PETRONM primarily operates the Petron Port Dickson Refinery, which has a rated capacity of 88k barrels per day. The facility produces a wide range of petroleum products including petrol, diesel, liquefied petroleum gas and aviation fuel. While PETRONM also markets and operates some petrol stations in Malaysia, the network of petrol kiosk is shared with a non-listed sister company, Petron Fuel International Sdn Bhd. 

Being largely a refinery, PETRONM’s earnings is highly susceptible to the fluctuations of crack spreads which is essentially the price difference between the cost of a barrel of crude oil which a refiner buys as input raw material and the selling prices of its output, petroleum products. While both crude oil and petroleum products are interrelated, they are each separate commodities, subjected to different day-to-day market forces. Therefore, losses can occur if cracking spread fails to cover the processing cost or when the cost of crude oil simply ends up higher than the selling prices of the end products. 

The Singapore Mogas 92 (Platts) Brent crack spread futures have fallen off a cliff from its peak in May-June 2022, and hence, we are anticipating results for the upcoming quarters to be drastically weaker. Crack spreads have generally enjoyed a gradual increase since 2021, underpinned by the declined global refining capacity amid refinery closures during the pandemic, low inventories, coupled with improved global demand for petroleum products as the world transitions out of the pandemic. The addition of the Russian-Ukrainian conflict has pushed crack spreads even further to peak in May-June 2022. Since then, crack spreads have declined steeply as regional supply has outstripped demand coupled with the inventory build-up, while recessionary fears continue to cast doubts over future demand. 

Petrol product prices to see mild rebound in coming months, but still nowhere near mid-2022 peaks. According to Environmental Impact Assessment’s projections, petrol product prices are expected to see a mild uptick towards end-2022/early-2023, although it will still be nowhere near the peak we saw in mid-2022. That said, the product markets will likely remain shaky until the mid-decade. The balance for fuel markets 

will continue to be fragile in both the short and long terms, with any global unexpected and prolonged outages leading to volatile prices — all while significant extra capacity will be slow to come online. 

Initiate coverage with ‘Market Perform’, and TP of RM4.65 — pegged to 5x PER on FY23F EPS, in line with average valuations of its closest peer Hengyuan Refining Co Bhd. Our ascribed valuation is also broadly in line with some of its other listed refinery peers globally (eg TOA Oil Co Ltd, Phillips 66 Co, HF Sinclair Corp, Valero Energy Corp, Marathon Petroleum Corp). Note that our TP has taken into account our in-house environmental, social and governance rating of two stars, which warrants a 5% discount to our initial valuations. 

Risks to our call include: (i) possible recession to dampen demand of petroleum products; (ii) sudden plunge in crude oil prices; and (iii) operational hazards (eg fire) that might disrupt utilisations.

Recommendation: Market Perform 

Target Price: RM4.65 by Kenanga Research (Oct 27) 

  • This article first appeared in The Malaysian Reserve weekly print edition