Despite return to profitability in 2002, outlook still tough due to narrowing margins

Bangchak Petroleum (BCP) returned to profitability in 2002 with a net profit of Bt538mn. However, this primarily due to rising oil prices, which allowed BCP to book gains on its oil reserve inventory and record wider marketing and refinery margins.

However, BCP’s earnings outlook does not look as positive. The company’s marketing margin has narrowed from a peak of Bt1.44/litre in 2Q02 to Bt1.1/litre at present despite the fact that oil prices have continued to increase. We believe this is due to government pressure on the market leader, PTT, to not fully increase prices at the pump.

BCP’s revenues rose 7% in 2002 to Bt51,804mn as a result of rising global crude oil prices and a 5.7% increase in volume sales. Rising oil prices allowed BCP to make a gain on its inventories and a turnaround in gross margins from a 0.6% to a positive 6.1%.

The company generated EBITDA of Bt2,880mn last year, which was enough to pay interest expenses of Bt1,300mn. However, cash flow from operations will not be sufficient to pay down some of BCP’s huge debt of Bt20bn, of which Bt6.4bn is due this year. The company‘s gearing ratio has fallen from 7.1x in 2001 to the current of 3.5x due to the revaluation of assets from Bt3,293mn to Bt5,172mn.

BCP recorded a normalised loss of Bt8mn in 4Q02 compared to normalized profit of Bt62mn in 3Q02. This was mainly due to the company’s marketing margin decreasing from Bt1.24/litre to only Bt1.05/litre. Based on the assumption that the margin remains steady at this level this year, we have revised our 2003 earnings forecast from a loss of Bt204mn to a profit of Bt67mn and our fair value estimate to Bt3.90. However, we do recommend investors to invest in this stock due to its weak financial position and huge debt. We maintain our recommendation AVOID on BCP.