PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)
What's news? PTTEP yesterday unexpectedly announced a cash offer to acquire Cove Energy Plc for 240 pence/share, a total price of £1.22bn (US$1.92bn). The new bid trumped Royal Dutch Shell, which offered 220 pence/share last month.
Effective purchase price implies 25% more than its last offer … The offering price of 240 pence per share is net of a 12.8% Mozambique government-imposed capital gains tax that Cove’s shareholders are liable for but which PTTEP will cover. As such, the effective purchase price is 275 pence/share, a total of £1.4bn (US$2.2bn)—25% more than its Feb offer of 220 pence/share (Mozambique announced the capital gains tax after PTTEP made its offer). The total effective offer price is also 37.5% above Cove's high-case LNG valuation for its stake in Mozambique Offshore of 200 pence/share, according to a YE11 Cove NPV10 report.
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 YE11. 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 CAPEX would be necessary (note that Cove is preparing a revised NPV10 based on the new resources).
…but it’s not yet to be over: According to PTTEP, there’s still uncertainty, as the submission deadline is about three months—the Mozambique govt allows PTTEP 28 days to submit a “Firm Intention” for its takeover offer, while Shell (and other possible contenders) have 46-60 days after PTTEP submits its Firm Intention to make new bids. If Shell were to equal the bid (in which case it would win it), we doubt that PTTEP would be able to come back with a higher offer.
Renewed recap risk—but likely phased out till next year: Management said that the firm will use cash on-hand of US$1bn with debt financing making up the balance to finance the purchase of Cove Energy, we believe that the size of this bid will ultimately force a recapitalization, and possibly of a greater scale than we previously envisaged.
Under the current funding mixture plans, we anticipate that PTTEP’s net debt/equity ratio would rise to 0.6x from 0.3x currently—breaching its policy threshold of 0.5x. The firm would also have to spend at least another US$1.8-2bn on project development. Our ballpark calculation suggests a $1.3bn recapitalization, implying a share dilution effect of a modest 7% (refer to our Feb 27 report: “Takeover bid for Cove—far from an end game yet”). But given that Cove Energy’s stake in the Rovuma field is only 8.5%, we doubt that PTTEP would acquire further stakes in the future—it just doesn’t have the size, in our opinion.
Action: We would regard the acquisition as a short-term negative for the stock. Recap concerns will rise and the dilution effect may perhaps be greater than anticipated—while the project’s commercialization is six years in the future (the field is currently undergoing appraisal and exploration. Cove aims for a final investment decision on the LNG project by 3Q13; the first gas would then be expected to flow in 2018—assuming no significant delays). As such, it’s very difficult to quantify how much incremental value the project could create for the firm in the meantime.