PTT presses ahead with huge foreign investments

 

The offer, announced yesterday, follows the $2.2-billion investment in UK-based Cove Energy by PTT Exploration and Production (PTTEP), which is 65.29 per cent-owned by PTT and a major contributor to the group’s earnings. 

In March, PTT Asia Pacific Mining, 60 per cent owned by PTT International – the group’s international investment arm – and 40 per cent by Sakari Resources, also invested $50.16 million for the remaining shares in Red Island Minerals, which owns a mining licence in the Sakoa Coal Field project in Madagascar. 

“The [latest] offer reflects PTT’s intention to increase its investment in Sakari Resources and enhance its strategic growth in the coal business. PTT Mining [wholly owned by PTT International] does not currently intend to maintain the listing status of Sakari Resources, if Sakari’s free float falls below 10 per cent, as required,” PTT president and chief executive Pailin Chuchottaworn said in a statement to the Stock Exchange of Thailand, referring to the offer for Sakari Resources. “However, PTT Mining reserves the right to re-evaluate its position at the relevant time, bearing in mind the ultimate level of acceptances received by PTT Mining and the prevailing market conditions.” 

Under the deal, PTT Mining has voluntarily made an offer for 55 per cent of Sakari Resources. Through PTT Mining, the Thai energy giant currently holds 45.27 per cent in Sakari, which operates coal mines in Indonesia. 

The share prices of PTT and Sakari Resources rose after the deal was announced. PTT ended the day at Bt333, 0.60 per cent higher, while Sakari closed 27.18 per cent higher at S$1.90 in Singapore.

PTT’s offer is S$1.90 for each share of Sakari Resources. The offer is conditional, as PTT Group seeks to win more than 50 per cent of the voting rights in the company. The transaction is expected to be completed by October. 

Bualuang Securities said in a research note that the price was reasonable. 

Though the offer price is 27 per cent higher than Sakari Resources’ closing price on Friday, it is equal to the stock’s 52-week average. 

“We think it’s reasonable, given the scope for reserve upgrades and production growth. Production is targeted to rise to 14 million tonnes in 2013 and to 17 million tonnes in 2014, from 12 million tonnes in 2012,” the securities house said.

According to Bualuang, the price implies US$12 per reserve tonne of coal, doubling the price paid at the entry and more than Banpu’s current implied price of $9/reserve tonne. 

“In our view, the high offer price is for absolute control of Sakari Resources, which has vast coal resources [that need to be developed into reserves]. Based on 2011 coal resources of 1,505 million tonnes [more than double the 2008 level of 638 million tonnes], the cost is only $1.16/resource tonne, comparable with PTT’s initial acquisition price in March 2009,” it said.

The acquisition will push PTT’s net debt/equity ratio up slightly to 0.61 time, from 0.56 at end-June.

Bualuang noted that if the burden to subscribe for PTTEP’s new shares is included, the net debt/equity ratio could rise further to 0.72 time, which would still be comfortably below its policy threshold of 1 time.

It was in 2010 that PTT first announced an investment in Sakari Resources, formerly known as Straits Asia Resources, paying Bt16.6 billion for a 45-per-cent stake.

PTT intends investing Bt720 billion overall during the next five years, mostly via PTTEP, which plans to issue 650 million new shares to raise nearly Bt93 billion. The recapitalisation, now delayed, will help maintain its debt/equity ratio below the threshold, or it would risk a credit-rating downgrade.

Amid concerns over PTTEP’s massive investment, Standard & Poor’s Ratings Services said in a report titled “What’s the Credit Impact of PTT Exploration and Production’s Growth Strategy?” that PTTEP’s credit rating and outlook remain unchanged at “BBB” with a negative outlook, after the Cove acquisition.

“Our ratings already factor in an acquisition of this magnitude and the associated additional debt. PTTEP’s business risk profile is also unlikely to improve in the short term because Cove’s assets are still in the exploration stage and are not reflected in the company’s reserves profile,” said S&P credit analyst Andrew Wong. 

“The capital-raising may not necessarily lead us to revise the rating outlook to stable from negative, and may not be sufficient to reduce PTTEP’s reliance on debt to fund future growth. While this [recapitalisation] can adequately cover the cost of the Cove acquisition, we believe PTTEP may still require additional debt to fulfil its stated growth plans of boosting production to 900 thousand barrels of oil equivalent per day by 2020,” he said.

S&P expects PTTEP’s recent acquisitions and growth strategy to improve the company’s business and financial risk profiles in the long term. Nevertheless, such improvement could come at the expense of the company’s financial risk profile in the interim.