PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)
 

Investment thesis: Despite PTTEP’s recent stock price retreat, our HOLD rating stands. Anticipation of only modest profit growth for FY12 and increased recap risk limit the scope for share price upside. PTTEP also looks unattractive in relative terms—a one-year forward PER of 11.9x versus 10x for CNOOC, a comparable E&P counter. In order to factor in our recent earnings forecast upgrade, our YE12 target price rises to Bt162 from Bt160. PTT still looks better.  
Weaker Q4 2011 core earnings expected … We anticipate on Jan 31 that PTTEP will post its strongest bottom-line for FY11 of Bt13,346m (Bt7,450m in Q3 2011). The marked increase is driven by the reversal of a huge Q3 2011 FX loss into a gain in Q4 2011. But the operational core number will post a 12% QoQ decline to Bt11,263m, as flooding during the quarter squeezed industry petro sales—PTTEP guided for average sales volume of only 250KBD, down almost 6% QoQ. We expect that the petro sales drop outweighed the effect of higher ASP (driven by soaring gas prices) and modest exploration write-offs of only US$25m (flat QoQ).               
... pick-up in petro sales to boost Q1 2012: Regardless of oil prices, core profit should trend upward in Q1 2012. Petro sales rose as the flooding receded—gas sales at Bongkot now average 630mmcfd QTD versus 560mmcfd in Q4 2011, while crude output from S-1 recovered to 26-27KBD from 22KBD the previous quarter. The risk of write-offs is also low—PTTEP plans to drill only one major well for a cost of US$30m in Q1 2012. As the well is in the Gulf of Thailand, the chances of it being successful are fairly good, in our view.
FY12 forecast lifted slightly … We have revised up our FY12 profit estimate by 1.1% to Bt47,628m because we now assume lower interest expenses than we did before. PTTEP guided that it is unlikely to increase leverage to finance its huge CAPEX plans for this year. Note that the firm typically executes only about 80% of its yearly CAPEX plan; the remainder is rolled over to a later year.
… but scope for upside limited: Based on our bearish oil price outlook, we see only limited scope for earnings upside this year. The variables associated with PTTEP’s FY12 sales target of 284KBD lean toward downside—the start-up dates for new projects could slip further and production ramp-ups at existing fields might fail to achieve targets. The firm planned for the Bongkot South and Montara projects to start operating by 2Q12 and late Sept, respectively, and production from S1 of 30KBD versus 26-27KBD currently.