PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

What’s new? PTTEP’s board yesterday gave the green light for the firm’s revised recapitalization plan and scheduled an EGM for October 29 for shareholders to vote on it. The board also set November 7 as the closing date for the right to subscribe to new shares. The book-building process is slated to be completed and the PO price announced by November 30. The share subscription period is to run December 3-6. 
Difference between past and revised recap plan—combination of RO and PP alike: PTTEP’s revised plan remains a preferential public offering (PO) for 650m new shares. The difference is that its parent company, PTT, now has similar rights to other shareholders with regard to the share allocation procedure. As such, the share allotment to PTT and other shareholders will be known after the book-building process is completed. Any unsubscribed PO shares will be redistributed to shareholders that oversubscribed. If any shares are still left over, they will be allocated through a private placement. PTT won’t participate in PP. Under the previous plan, 400m new shares were to be reserved for PTT with the remainder allotted through a preferential PO.
Risk to success of recap removed—but concerns remain: The new plan leads us to believe that PTTEP’s recapitalization plan will go ahead. PTT is eligible to vote on its subsidiary’s recapitalization plan and the allocation procedure, but won’t participate in the book-building process. In contrast, under the previous plan, PTT could not vote.
Note that PTTEP guides that PTT aims only to maintain its percentage shareholding at its current 65.28% stake. The implication is that PTT won’t buy any extra shares through the PP. It also raises concerns as to whether PTT would subscribe to its full allotment under the PO in the event that non-PTT shareholders declined to subscribe, in which case the recapitalization could fall short of the target. As such, the recap shortfall scenario may generate negative sentiment toward PTTEP.
Action: The board’s approval of the recapitalization plan yesterday boosted sentiment toward PTTEP, as perceived risk to the success of the plan had declined. Nevertheless, we don’t anticipate spectacular share price upside from the current level—there remains the possibility of the firm failing to achieve its recap target of US$3bn if subscription falls short of the plan, given that PTT apparently won’t buy any of the unsubscribed shares.
Moreover, we see risk of further slippage to the start-up of the Montara field from its current schedule of December. The Australian government will soon approve the firm’s safety case (safety certification) to hook up its FLNG unit with its production platform. But we feel that the hook-up commissioning process could take some time to be completed; thus the commencement date may fall behind schedule. If this was to be a case, the further postponement would prompt a consensus earnings forecast cut for FY13, as we and the street currently assume that Montara will start-up by early January. Based on our stress-testing, every quarter of delay to Montara production would squeeze our FY13 bottom-line projection by Bt4.7bn (7%). Our HOLD rating stands on PTTEP.       

Action: The board’s approval of the recapitalization plan yesterday boosted sentiment toward PTTEP, as perceived risk to the success of the plan had declined. Nevertheless, we don’t anticipate spectacular share price upside from the current level—there remains the possibility of the firm failing to achieve its recap target of US$3bn if subscription falls short of the plan, given that PTT apparently won’t buy any of the unsubscribed shares.
Moreover, we see risk of further slippage to the start-up of the Montara field from its current schedule of December. The Australian government will soon approve the firm’s safety case (safety certification) to hook up its FLNG unit with its production platform. But we feel that the hook-up commissioning process could take some time to be completed; thus the commencement date may fall behind schedule. If this was to be a case, the further postponement would prompt a consensus earnings forecast cut for FY13, as we and the street currently assume that Montara will start-up by early January. Based on our stress-testing, every quarter of delay to Montara production would squeeze our FY13 bottom-line projection by Bt4.7bn (7%). Our HOLD rating stands on PTTEP.