Refining & Marketing Asia

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Refining & Marketing Asia 2017 Outlook - Demand Growth in China, India Supports Stable Outlook Despite Supply Glut Laura Acres Managing Director +65.6398.8335 laura.acres@moodys.com Rachel Chua Analyst +65.6398.8313 rachel.chua@moodys.com Vikas Halan Vice President Senior Credit Officer +65.6398.8337 vikas.halan@moodys.com November 2016

2017 Asian Refining and Marketing Outlook Stable NEGATIVE STABLE POSITIVE What could change outlook to negative» Net refining capacity additions in Asia materially outpace demand growth, leading us to project a 10% or more decline in industry EBITDA» Contraction in refinedproduct demand from China and India» Industry s EBITDA will decline a modest 1%-3% through 2017» Supply-side pressures from increased refinery run rates in China, as well as capacity additions and high stockpiles in the region continue to weigh on profitability despite slow but steady demand growth» Refining margins will be volatile but are likely to recover modestly to average $5-$5.50 per barrel over the next 12-18 months» Healthy petrochemical margins will support earnings of most Asian refiners What could change outlook to positive» Demand overwhelms capacity additions such that refining margins exceed $8 per barrel on a sustained basis, leading us to raise our EBITDA growth projection to above 10% Since outlooks represent our forward-looking view on business conditions that factor into our ratings, a negative (positive) outlook suggests that negative (positive) rating actions are more likely on average. However, the industry outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the industry, but rather our assessment of the main direction of business fundamentals within the overall industry. 2

Slow but Steady Demand Growth Supports Margins; Increasing Chinese Exports Remains Key Risk Key credit themes» Refined-product demand growth from China and India will remain slow but steady in 2017-18» We do not expect a material improvement in demand-supply dynamics over the next 12-18 months, with demand growth only matching or marginally exceeding total supply additions» Rising petroleum exports from China remains key risk. Government approval for teapot refiners to import crude directly encourages high refinery run rates and export volumes.» Refiners focused on domestic markets are least vulnerable to growing Chinese exports Indian Oil Corporation Ltd. (Baa3 positive), Bharat Petroleum Corporation Ltd. (Baa3 positive), Hindustan Petroleum Corporation Ltd. (Baa3 positive) and Thai Oil Public Company Ltd. (Baa1 stable) are less vulnerable 3

Asian Refiners Will See Modest Earnings Contraction» EBITDA will decline 1%-3% through 2017, due to supply-side pressures from increased refinery run rates in China, capacity additions and high stockpiles» China s slowing economic growth will temper underlying product demand China s refined-oil-product demand growth likely to slow to around 3% in next two years» India s petroleum consumption likely to grow 6% annually in 2017-18» Demand-growth projections of 0.9 million bpd through 2017 will marginally outstrip net refining capacity additions of 0.7-0.75 million bpd in the region Asia Pacific s Year-on-Year Growth in Liquid Fuels Consumption Will Stagnate at 0.9 Million Bpd in 2016-17 China Japan India Others Annual Change (mmbbl/day) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 2012 2013 2014 2015 2016(F) 2017(F) Source: U.S. Energy Information Administration s Short-Term Energy Outlook, September 2016 4

Rising Chinese Petroleum Exports Will Add to Abundant Supplies» China s exports of refined products will remain high following the Chinese government s approval for small-scale independent refiners to import crude directly since July 2015» We project China s full-year net exports in 2016 will likely exceed the 21 million tons achieved in 2015 China s Net Exports of Gasoline, Kerosene and Diesel in 2016 Will Likely Hit a Record High 25 Gasoline Kerosene Diesel 20 15 million tons 10 5 0-5 2011 2012 2013 2014 2015 2016 Jan-Jul Sources: Wind Info, Moody s Investors Service 5

Refiners Focused on Domestic Sales Will Be Less Impacted» Refiners focused on domestic markets are least vulnerable to growing Chinese exports and weakening Chinese demand This includes India s three state-owned refiners -- Indian Oil Corporation Ltd. (Baa3 positive), Bharat Petroleum Corporation Ltd. (Baa3 positive), Hindustan Petroleum Corporation Ltd. (Baa3 positive) -- as well as Thai Oil Public Company Ltd. (Baa1 stable)» Export-oriented refiners such as SK Innovation Co. Ltd. (SKI, Baa2 positive), GS Caltex Corporation (GSC, Baa2 stable) and S-OIL Corporation (Baa2 stable) are most exposed to China s rising exports and softening demand These refiners are highly dependent on Asian markets for their exports and have a considerable direct or indirect exposure to China Around 10%-15% of the Korean players sales revenues are derived from China 6

Refining Margins Will Be Volatile» Regional benchmark Singapore complex refining margin will remain volatile in 2017 but average $5-$5.50 per barrel, in line with long-term averages» Low profitability levels will force small-scale, low-complexity refiners with a higher cost of production to cut back on output, thereby partially easing supply pressure» Refiners will also benefit from the per-barrel discounts that crude oil suppliers are extending in the oversupplied oil markets We Expect the Singapore Refining Complex to Improve over the Next 12-18 Months Amidst Volatility $ per barrel 140 120 100 80 60 Brent Brent-Moody's expectations Singapore refining complex (right-axis) Moody's expectations: $5-$5.50 per barrel 10 8 6 4 $ per barrel 40 2016: $40 per barrel 2017: $45 per barrel 20 2013 2014 2015 2016 2017 Sources: Bloomberg, Moody s Investors Service 2 0 7

Healthy Petrochemical Spreads Will Support Earnings of Most Asian Refiners» Most Asian refiners have integrated petrochemical operations accounting for 20%-40% of earnings; healthy petrochem earnings will cushion the impact of lower refining profits» Stable demand growth for key products paraxylene and benzene will partially balance new capacity additions over the next six months» Cheaper naphtha feedstock prices resulting from the weak crude prices will also maintain the improved profitability of naphtha-based petrochemical producers such as Reliance Industries Limited and SK Innovation Spreads of Key Aromatics and Olefins Products Are Improving 1,000 Paraxylene-Gasoline Ethylene-Naphtha 800 $ per ton 600 400 200 - Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Sources: Thai Oil and PTT Global Chemical Public Co. Ltd quarterly presentation slides 8

Rated Asian R&M Companies ISSUER COUNTRY RATING OUTLOOK Thai Oil Public Company Limited Thailand Baa1 Stable SK Innovation Co. Ltd. Korea Baa2 Positive Reliance Industries Limited India LC/FC: Baa2 LC: Positive FC: Stable S-OIL Corporation Korea Baa2 Stable GS Caltex Corporation Korea Baa2 Stable JX Holdings Inc. Japan Baa2 Negative Indian Oil Corporation Ltd. India Baa3 Positive Bharat Petroleum Corporation Ltd. India Baa3 Positive Hindustan Petroleum Corporation Ltd. India Baa3 Positive IRPC Public Company Limited Thailand Ba1 Stable 9

Singapore Rachel Chua Analyst +65.6398.8313 rachel.chua@moodys.com Shanghai Kai Hu Senior Vice President +86.21.2057.4012 kai.hu@moodys.com Vikas Halan Vice President - Senior Credit Officer +65.6398.8337 vikas.halan@moodys.com Hong Kong Wan Hee Yoo Vice President - Senior Analyst +852.3758.1316 wanhee.yoo@moodys.com Laura Acres Managing Director - Corporate Finance +65.6398.8335 laura.acres@moodys.com Tokyo Kailash Chhaya Vice President - Senior Analyst +81.3.5408.4201 kailash.chhaya@moodys.com 10

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