PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Currently removing oil slick and recovering environment
There was a leakage of a 16-inch offshore crude oil pipeline at a single point mooring
20 km southeast of Map Ta Phut port while discharging crude oil to PTTGC's refinery
on 27 July 2013 at 6.50 am. About 50 ton or 316 barrel of crude oil spilt into the sea.
PTTGC has currently been removing oil slick, which is likely to take 3 more days to
clean completely before starting the environment recovery. The damaged pipeline is
not likely to affect refinery's operation, as there are other pipelines to resume crude
oil discharge to the refinery. The problem is that, after all oil slicks are completely
removed, environmental recovery would follow, which the expense is still cannot be
accessed. However, PTTGC has insurance coverage under the following: 1) property
damage of US$2.38bn, with premium expense of US$2.5m (deductible), 2) Marine
cargoes liability insurance of US$330m per trip of oil discharge with 0.5% premium
expense (deductible), 3) third party liability insurance of US$50m (public-related).
- B5bn environment recovery cost in worst-case scenario, likely to affect EPS by 15.2%
We have preliminarily calculated the damage on PTTGC's profit due to the incident. In
3Q13, PTTGC must set provision for the expenses in advance, as follows: 1)
replacement of the broken pipeline, projected not to exceed the deductible of property
damage insurance fund of US$2.5m, or B75m, 2) damage due to oil loss (marine
cargoes insurance) preliminarily estimated at US$32,000, or B1m; which the assured
(PTTGC) has to pay B5000 for the insurance, 3) expenses due to damages to third
person, mainly for slick oil removal and environment recovery, including
compensation for those affected from the incident, with the total insurance money of
B1.5bn. Expenses in replacement of the broken pipeline and lost oil that PTTGC has to
pay in 1) and 2) would not affect PTTGC's earnings severely, but the main factor to
slash PTTGC's earnings is compensation for damages to third person, which the
calculation is still incomplete. After crude oil leakage in Montara project (PTTEP), 100x
more oil was loss in Montara incident, US$35m was spent on slick oil removal and
US$15m on environment recovery, or US$50m total. However, PTTGC's incident took
place closer to the shore, so compensation for those affected could be higher. We
have done sensitivity analysis on damage on FY2013 EPS and fair value in case
B15.5bn provision has been set. For the best-case scenario, PTTGC had to pay less
than B1.5bn ceiling due to insurance claim. If the expenses exceed the ceiling, it may
affect EPS and fair value differently. However, in worst-case scenario, if PTTGC had to
pay more B5bn, FY2013 EPS and fair value might drop 15.2% and 5.6%.
- Share price might be pressed in short term, waiting for clarity
We believe that this issue is not going to be solved shortly. Though current fair value
has dropped 10% since the incident to reflect that expense exceeding B10bn not
likely to happen again, fair value is not likely to rise in near future. Thus, investors
holding this stock should continue holding. If investors want to buy, wait for clarity.