Star Petroleum IPO rises out of antitrust concerns

PTT is looking to offload its stake after it was accused of monopolising Thaliand's refinery business by taking controlling stakes in major refining companies.

Thai oil refining company Star Petroleum is scheduled to launch an initial public offering in the second week of November as part of state-owned energy conglomerate PTT’s asset restructuring programme.

Sources familiar with the offering told FinanceAsia that the deal, which will help loosen PTT's monopolistic grip on the sector, will likely be worth about $500 million and comprise secondary shares sold in the main by PTT as well as primary shares.

PTT has previously announced that it will sell all or part of its 36% holding through the listing. US energy giant Chevron, which owns the remaining 64% stake, is expected to retain a controlling stake in the company, the sources familiar with the deal said.

The Star Petroleum IPO follows antitrust concerns as a result of PTT's shareholdings in five of the nation’s six leading oil refineries. At the beginning of this year, PTT not only held a controlling 49.1% stake in Thai Oil, the country’s largest refinery by overall capacity, it also owned 48.9% of PTT Global Chemical, 38.9% of IRPC, and 27.2% of Bangchak Petroleum.

In April PTT sold its entire stake in Bangchak Petroleum to Thailand’s Social Security Office and Krungthai Asset Management for $408 million. “To ensure that PTT’s business follows its strategic direction and to cope with a public concern over monopolisation in the refinery business, the Board of Directors has resolved to divest PTT’s entire equity in Bangchak Petroleum,” the state-owned oil and gas giant said in a statement at the time of the sale.

By disposing of all or part of its 36% holding in Star Petroleum, PTT is now extending that realignment to enable greater competition in the Thai fuel refining sector, the sources familiar with the deal said.

Valuation

Bank of America Merrill Lynch, one of two international bookrunners on the transaction, estimates the company's fair value at between $984 million and $1.43 billion, or about 7.7 to 12.1 times next year's forecast earnings.

The second, Morgan Stanley, is more aggressive, giving a fair value range of $1.4 billion to $1.8 billion. According to its estimates, that's equivalent to 8.9 to 11.8 times 2016 earnings.

Based on a rough mid-point of the two respective fair value ranges and assuming an IPO discount, Star Petroleum is likely to settle at below 10 times forecast earnings, which is in line with the average price-earnings ratio of 9.6 for the other five listed Thai refiners.

Both houses forecast a net profit decline next year because profit margins for gasoline products are expected to fall from its peak of $17 per barrel in the first half of 2015. In addition, new pricing agreements between Star Petroleum and its major customers are expected to squeeze gross refining margins by 12% on a year-on-year basis, according to Morgan Stanley.

Business

Star Petroleum differs from other publicly listed refineries operationally because it does not have a retail marketing business. As such, it is highly sensitive to changes in gross refining margins – the price difference between crude oil and refined oil products.

Morgan Stanley analysts estimate that every 50 US cents change in the gross refining margin will lead to a 20% fluctuation in Star Petroleum’s earnings next year.

By comparison, the earnings sensitivity of other refining companies is lower at around 12% to 16% because their downstream businesses can better diversify part of the margin squeeze.

Star Petroleum is also small in terms of its production capacity. With an output of 1.65 million barrels per day, it ranks fifth among major Thai refining companies, barely topping Bangchak Petroleum at 1.2 million bpd.

It is even smaller from a regional standpoint. Major oil refiners in Asia such as Indian Oil and Korea’s SK Innovation have production capacities of at least 5 million bpd.

On the positive side, Star Petroleum has a stable source of revenue because it has offtake agreements with its major customers Chevron and PTT, under which they are obliged to purchase most of its refined oil products.

The company also has a relatively low net-debt-to-capital ratio of 0.6 times, as of the end of June, which is expected to drop further to 0.3 times once the IPO is completed.

In addition, its capital expenditure is expected to fall to $20 million next year from about $70 million last year after the completion of most of its investment programme.  

Market stability

Share sales in Thailand tend to be domestic-driven. However the $500 million price tag on Star Petroleum's IPO, which would make it the second-largest domestic Thai deal this year, is unlikely to make it to market without the participation of foreign institutional investors.

So it's just as well that the backdrop appears broadly supportive. 

Despite falling 12.5% off its February peak the SET Index is considered much less volatile compared with other Asian stock markets thanks to the Thai baht's relatively strong performance  against other Asian currencies.

Foreign investors may also get a confident boost by the recent rally of oil refinery stocks. IRPC, for instance, has rebounded 28% from its lowest point in late August. Thai Oil has also rallied 25% in the same period.

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