Recap delay add questions on PTTEP's expansion

A PTTEP source said investors questioned the Cove Energy acquisition, as it requires US$2.2 billion (Bt69 billion) for an 8.5percent stake in the Rovuma petroleum field off Mozambique, which promises proven reserves of 60 trillion cubic feet. With the small stake, Cove is not the main operator and its rights over the field are in question, as is how long it will take for the investment to break even. 

In terms of national energy security, again given the small stake, there are also questions how PTT and Thailand can utilise gas from the far-away field and how reasonably it will be priced when it is available here.

PTTEP’s takeover of UK-based Cove Energy is considered by some too large an investment for a low anticipated return. According to the source, some investors also questioned whether this was politically motivated, as the acquisition was completed after PTT Group’s executive restructuring. 

They also questioned whether PTTEP would need new capital for further development in the Rovuma field and others shared by Cove Energy.

Saying that it needs some time to explain the issues of the recapitalisation to 60 per cent of nonPTT shareholders, including foreign ones, management will propose a new timeline for the shareholder meeting at the next board meeting in 45 days. It remains in question whether the delay would derail the overseas investment plan of the company, which contributed more than 60 per cent of earnings to PTT in 2011.

Maybank Kim Eng Securities (Thailand) said the postponement would have a psychological impact on the company’s share price in the next month or two, pending possible change in the recapitalisation structure. 

Earlier, the recap was expected to be completed in November. Management acknowledged that PTTEP could risk a downgrade if the recap failed, but operations should stay intact for the next three years. Still, it might derail the target to raise capacity to 900,000 barrels a day by 2020.

At an analysts’ meeting yesterday, Tevin Vongvanich, president and chief executive officer, acknowledged that shareholders he met during a recent roadshow on the Cove deal expressed concerns about the structure and size of the recapitalisation, the acquisition of Cove Energy and further fundraising needs if the firm is to achieve its production target of 900,000 barrels a day. He said the company had yet to give more information to nonPTT shareholders, particularly foreign ones. 

Bualuang Securities said in a research note that the most troubling issue for minority shareholders was probably PTTEP’s de facto rightsoffering structure, which raised concerns about the possibility of some shareholders receiving preferential treatment over stock allocations. 

It said it was worth noting that the structure of the recapitalisation and bookbuilding methodology will require approval from 75 per cent of the nonPTT shareholders that attend the meeting. 

Executives said the firm might review the current structure to realign it to take concerns into account, particularly with regard to American shareholders.

PTTEP earlier planned to host the extraordinary shareholder meeting to approve the recapitalisation yesterday. It plans to issue 650 million shares: 403.4 million to be offered to PTT – the major shareholder with 65.29 per cent – and the remaining 214.4 million to the public. 

Despite management’s confidence that the recapitalisation will take place before the end of this year, Bualuang Securities said it was likely that the date would slip back to next year because of procedural amendments. If it happens after the Montara field in Australia resumes operations, sentiment will be boosted. But if the resumption is delayed further, the cash call might conceivably be derailed. 

“If the fundraising effort were to consume more time than PTTEP envisages – particularly if the recapitalisation procedure must be changed – there could be risk of a creditrating downgrade,” the securities house said. “PostCove acquisition net gearing will rise to 0.60.7 time (from 0.4), which would be above its 0.5-time policy threshold. 

“Management claims that the rating agencies agreed to hold their ratings unchanged for as long as the recap plan remains underway.”