PTTEP's new bid raises concerns
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PTT Exploration and Production Plc's revised bid for Cove Energy Plc caused concerns over its financial strength.
In its latest bid, announced on May 23, PTTEP increased the offer for Cove Energy by 25 per cent to beat Royal Dutch Shell's offer. PTTEP offered 240 pence per share for Cove Energy, trumping Royal Dutch Shell which offered 220 pence/share last month. It said that the investment by wholly-owned subsidiary PTTEP Africa Investment Ltd (PTTEP AI) will be funded by a mixture of existing cash resources and a committed debt facility available to the PTTEP Group.
In its research note, Bualuang Securities questioned the hefty increase in the bid price.
"The management claims that this new bid is based on Cove's revised recoverable gas resources of 50tcf (announced on May 15), up from 30tcf at the end of 2011. But we feel that value accretion from revised resources does not need to rise proportionately, as proved reserves practically make up a small proportion of the total recoverable natural gas resources and more capital expenditure would be necessary," it said.
As the management plans to finance it with $1 billion cash and debt financing for the balance, it said PTTEP's net debt/equity ratio would rise from 0.3 time to 0.6 time, breaching the company's policy threshold of 0.5 time.
The firm would also have to spend at least another US$1.8-$2 billion on project development.
The securities firm said recapitalisation is necessary, probably at $1.3 billion.
Meanwhile, Standard & Poor's Ratings Services has maintained its negative outlook on credit rating.
In a statement, S&P noted that such cash offer of 1.221 billion pound sterling does not immediately affect the company's rating (BBB+), given that the offer is conditional. Among other things, PTTEP needs at least 90 per cent shareholder acceptance and the written consent from the Republic of Mozambique's Minister of Mineral Resources.
"We recently revised the outlook to negative to reflect our view that PTTEP's debt is likely to remain elevated for the next two years due to the company's sustained growth strategy. This is because PTTEP is unable to use much of its operating cash flow to fund its stated growth plan. In our view, PTTEP's offer to acquire Cove Energy reflects its growth strategy. We believe any proposed transaction could increase PTTEP's leverage and strain credit metrics at the current rating level if the company funds the acquisition with debt," S&P said.
