PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP) 
 
A Kenyan government official has today threatened to block PTTEP’s COVE acquisition unless it pays capital gains tax. But we see this as a resolvable negative event with minimal impact on PTTEP. The soon-to- end risk for capital increase should help drive its share price rerating. Even with the slightly higher regulatory risk, we remain positive on PTTEP, especially for its solid earnings growth outlook in 2013. We retain our Outperform call and DCF-based target price of THB190. 
What Happened
The Reuters news agency today reported that the Kenyan government has threatened to block PTTEP’s acquisition of COVE unless it pays tax to the Kenyan government. This is unexpected given that the COVE acquisition has already been completed. Of COVE’s total acquisition cost of US$2.2bn, PTTEP has already paid US$230m in capital gains tax to Mozambique on behalf of
COVE’s previous shareholders.
What We Think
This latest development is a negative surprise for PTTEP. However we believe that it will negotiate with the Kenyan government rather than dispute the charge, and eventually agree to pay the tax in order to maintain a good working relationship with the government. We also think that the financial impact will be small given that unlike COVE’s asset in Mozambique (Rovuma Offshore Area
1) with its large secured gas resources of 65tcf, COVE’s asset in Kenya remains unexplored and hence has no proven value. We estimate that the Kenyan asset accounts for only 0.4%
of COVE’s NAV value vs. PTTEP’s acquisition cost of US$4.2/shr. This is far below the Kenyan government’s estimate of 10% of COVE’s asset value.
What You Should Do
Buy on weakness, especially if the share price dips below THB155. We believe that near-term, investors will still be concerned about the trading risk of a potential dilution from the sell-off post-capital increase. We expect a share price recovery post the completion of the capital increase
given PTTEP’s solid earnings outlook.The Kenya impact should be minimal but could be noise for PTTEP.