PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

Investment thesis: While the current share price has retreated to our ex-Montara DCF value (also PTTEP’s implied PO price; see our July 23 report), we don’t see any need to take positions. There is risk that the new stock issue might not be fully subscribed. PTT’s ceiling shareholding in PTTEP is 66.67% versus 65.28% currently—the timeframe for book-building is possibly by end-Sept or early Oct. If so, it might put its cash call on hold, which would dampen sentiment, in our view.
Good Cove assets, but still premature: PTTEP claims that Mozambique (where Cove has 8.5% of Offshore Area 1) potentially has vast gas resources. There were several major gas discoveries in the country during the past three years and the development cost for LNG is only US$9.9/boe versus $14.9-21/boe of other regions, according to the firm. PTTEP guides that it used an LNG price projection of $11-12/mmbtu to determine the bidding price for Cove; the current LNG Asian spot price is $16/mmbtu with a gas resource assumptions in the range of 27-60tcf, so it believes there is scope for upside to Cove’s value.
But shale gas and the restarts of Japanese nuclear power stations present a major threat to the sustainability of LNG prices (the European spot price is only US$8.75/mmbtu)
Cove plans to drill four more exploration wells. It may raise LNG production from its earlier plan of 10mtpa. But it the project won’t seal commercial agreements with gas offtakers until final investment decisions are made in late 2013. Start-up is tentatively slated for 2018.
Production target of 500KBD by FY15; more purchases necessary …  PTTEP aims for FY15 production of 500KBD (up 79% from FY12’s 280KBD). In order to achieve that goal, it will have to buy into more fields. The firm will focus on either operating or near-producing assets. But an increased stake in Offshore Area 1 is not on the table—management says the project’s start-up schedule doesn’t match with its mid-term target. The areas of focus will be North America (we suspect shale gas assets). Yet, the firm guided that there won’t be any new acquisitions this year. 
…and increased exploration, which will mean a CAPEX surge: Apart from acquisitions, we expect the firm to accelerate exploration at existing assets, especially new concessions in Myammar (M3 and M11). PTTEP plans to undertake an appraisal drilling program in M3 and exploration drilling in M11 by early FY13. With regard to Cove, the firm preliminarily expects its investment budget to be US$1.1-1.3bn. We, however, suspect that costs will escalate and that the aforesaid estimate is based on only 10mtpa of LNG production.