Overview of Thai Oil Public Company Limited (TOP)

Thai Oil Public Company Limited (TOP) is a leading oil refinery company that also produces a variety of oil-related products, including LPG, kerosene, fuel oil, and chemicals. The company operates within the energy sector and is a key player in the region. Despite its prominent position, the company is facing challenges related to its flagship Clean Fuel Project (CFP).

Investment Recommendation

The analysts have maintained a HOLD recommendation on Thai Oil, with a revised target price of Bt27.00, down from the previous target of Bt42.00. This represents a 1.89% upside from the current share price of Bt26.50. The downgrade reflects uncertainties surrounding the Clean Fuel Project (CFP) and its delayed operations.

Key Updates on Thai Oil

Additional Investment in CFP and Project Delays

The board of directors at Thai Oil has approved an increase in investment costs for the Clean Fuel Project (CFP) by US\$1.78 billion, with an additional US\$505 million in interest during construction (IDC). This brings the total investment in the CFP to US\$8.23 billion. The project, originally scheduled to be operational by 1Q25, has been delayed to 3Q28. The delays affect key components, including the Crude Distillation Unit 4 (CDU#4) and the Residue Hydrocracking Unit (RHCU).

Funding Strategy for CFP

Thai Oil has confirmed that there is no need for capital raising to fund the additional investment. The funding will be sourced from:

• Issuing debt and non-debt instruments, including perpetual bonds and the divestment of Chandra Asri Petrochemical (CAP), totaling US\$1.0-1.5 billion.
• Existing debt of US\$2.90 billion.
• Cash on hand and operational cash flow. As of 3Q24, Thai Oil had US\$1.0 billion in cash on hand, with free cash flow projected to average US\$400 million annually from 2025 to 2028.

Impact on Project Economics

The additional investment is expected to raise the total production cost to US\$6.8/bbl, compared to the original cost of US\$5.8/bbl. Consequently, the project’s internal rate of return (IRR) is projected to drop from 12.0% to 8.2%, barely exceeding the weighted average cost of capital (WACC) of 7-8%. However, Thai Oil anticipates a rise in market gross refining margin (GRM) by US\$4.0-5.0/bbl upon project completion.

Financial Performance and Outlook

Key Financial Metrics

Profitability and Growth

Thai Oil’s EBITDA margin is expected to decline from 8.8% in 2023 to 6.0% by 2026. Net profit is projected to drop significantly, from Bt19,443 million in 2023 to Bt8,788 million in 2026. The company’s return on equity (ROE) is also expected to fall from 11.6% to 4.9% during the same period.

Risks and Challenges

The Clean Fuel Project faces multiple risks, including:

• Uncertainty over shareholder approval for the revised investment plan.
• Potential cost overruns if changes in contractors are required.
• Technical risks associated with the Residue Hydrocracking Unit (RHCU).
• Market risks linked to the energy transition and declining oil demand by 2028-29.

Valuation and Recommendations

The analysts have revised Thai Oil’s valuation methodology, lowering the target forward PE multiple to 7x, down from 10x. This reflects the increased risks and uncertainties surrounding the Clean Fuel Project. Investors are advised to consider switching to other companies in the oil and gas sector, such as Bangchak Corporation (BCP) and Indorama Ventures (IVL), which are highlighted as top picks.

Environmental, Social, and Governance (ESG) Initiatives

Thai Oil has made commendable strides in ESG, achieving a CG rating of 5 and a SET ESG rating of AAA. Key initiatives include:

• Environmental: Reducing greenhouse gas emissions by 15% by 2035, aiming for carbon neutrality by 2050 and net zero emissions by 2060.
• Social: Strengthening community engagement and supporting reforestation projects.
• Governance: Maintaining zero cases of non-compliance and fraud incidents.