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
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2016 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s Publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act 2001. MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. 13