PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

What's news? On Feb 24, PTTEP offered £2.20/share in cash for Cove Energy Plc, an AIM-listed E&P operator with a minority stake in a big offshore gas field in Mozambique and prospecting leases in Tanzania and Kenya. The offer values Cove at about £1,120m (about US$1,777m) and trumps a Feb 22 bid by Royal Dutch Shell Plc. Cove said in a statement that the formal sale process will continue and that it reserves the right to reject any offer.
Offering price a 10% premium to Cove’s NPV10 … PTTEP’s proposed offer of £2.20/share was almost double Cove’s closing price prior to its formal Jan 5 announcement of being available for sale and was 30% higher than its five-day average. The price also implied a 10% premium over Cove’s high-case LNG valuation for its stake in Mozambique Offshore of £2.00/share, according to a recent Cove NPV10 report (see Figure 2). In our view, PTTEP is also paying for the possibility of upside from offshore prospecting leases in Kenya (3D seismic survey underway, drilling scheduled), onshore in Mozambique (seismic, drilling scheduled) and a lease in Mnazi Bay (Tanzania; gas sales contracts under negotiation).
…but probably not at an end game: But we think it would be premature to conclude that PTTEP will win Cove. Royal Dutch Shell is keen to buy Cove’s assets, as it has only a limited E&P presence in East Africa. Apart from Shell, Exxon Mobil, BP and India’s Oil & Natural Gas Corp have also considered bidding for Cove. As such, a counter-offer is conceivable. Last Friday, Cove stock rose 21% to £2.35, indicating that investors are betting on further offers.
What if PTTEP wins?—Short-term pain; long-term gain … Cove’s primary asset is a minority stake in Rovuma Offshore Area 1 (Mozambique), a world class gas discovery estimated at 30 trillion cubic feet (equal to 5bn BOE or almost 6x PTTEP’s proved reserves). The field is currently undergoing appraisal and exploration. Cove aims for a final investment decision on the LNG project by 3Q13; the first gas expected to flow in 2018 (see Figure 1). Meanwhile, the development of other projects—the Rovuma Onshore Area in Mozambique, offshore deepwater projects in Kenya and Mnazi Bay are so far at preliminary stages of exploration.
Cove said in its press release that the investment budget for developing an LNG project (including upstream and an LNG plant) for Mozambique Offshore is only US$10.5/BOE versus PTTEP’s current E&P cost of US$13/BOE. That said, PTTEP would spend at least another US$1.8-2bn on project commercialization in 2018. Also, the acquisition would tighten the firm’s balance sheet—its net debt-to-equity ratio would shoot up to 0.67x from 0.4, far above its policy ceiling of 0.5x. That would probably make a cash call necessary. Our ballpark calculation suggests a $1.3bn recapitalization would be necessary to bring back its net debt/equity ratio back to below 0.5x and cover Cove’s significant CAPEX requirements—implying a share dilution effect of a modest 7%.
Action: The acquisition would be long-term positive for PTTEP. Cove would provide the firm with a fresh source of LNG in East Africa where a number of IOC, NOC and Independent operators plan high-impact, multi-year exploration campaigns across the region. Cove’s vast gas reserve can be converted into liquid and shipped to supply Asian markets—LNG demand in Asia is rising almost 20% per annum, outstripping the rate of production growth.
Yet, we think it’s too early to jump onto this bandwagon, as counter-offers from other E&P operators are possible. If PTTEP were to win a bid, we would regard the acquisition as a short-term negative for the stock. Recap concerns would rise, while the project’s commercialization is six years in the future. As such, it’s very difficult to quantify how much incremental value the project could create for the firm in the meantime.