Moody’s wary of Asian oil refiners

Earnings of Asian refining and marketing (R&M) companies will contract next year as higher regional crude prices drive up feedstock cost, with retail fuel price regulation in some countries pressuring marketing margins, says Moody’s Investors Service.

“We believe these regional headwinds will drive a 3%-4% decline in aggregated earnings before interest, tax, depreciation and amortisation (ebitda) through 2019. The ebitda decline would have been higher if not for continuing modest demand growth in Asia,” said Rachel Chua, Moody’s assistant vice-president.

“The falling ebitda contrasts with our positive outlook for the global R&M sector, which reflects projected ebitda growth helped by lower crude prices and strong distillate spreads in North America.”

The US Energy Information Administration (EIA) projects demand for petroleum products in Asia-Pacific will rise 2.5% or 0.9 million barrels per day (bpd) through 2019 to 36.3 million bpd.

China and India continue to be the key growth pillars, contributing over 80% of the region’s fuel demand growth, said the EIA.

Moody’s report said higher feedstock costs will constrain refining margins in Asia, with the price premium of regional Dubai crude over West Texas Intermediate crude widening to in excess of US$8 per barrel in October 2018, considered the highest level since early 2015.

Moody’s expects the benchmark Singapore complex refining margin will stay benign at $5.5 per barrel over the next 12 months, largely in line with the year-todate average.

Moody’s projection also accounts for mounting Chinese petroleum exports to the Asian market, which are in direct competition with other export-oriented Asian refiners.

The reintroduction of fuel subsidies will squeeze marketing margins, said Moody’s. Specifically, oil marketing companies in India and Indonesia have been asked by their governments to sell petrol and diesel to consumers at subsidised prices, for which they will not receive any reimbursements.

The re-emergence of fuel subsidies could extend to more Asian countries if the oil price rally persists.

R&M companies’ large investments and high working capital levels will raise total borrowings, according to Moody’s. Asian refiners are expected to push ahead with large investment plans aimed at boosting profitability and improving resilience to volatility in refining margins. This could scale back dividends likely result in continued negative free cash flow, said Moody’s.