PTT Exploration & Production

PTT Exploration & Production Plc

Investment thesis
Following PTTEP’s analyst meeting, we are more cautious about its FY14 outlook, due to a lower FY14 petro sales target. An impairment tied to an asset swap in the KKD project presents another headwind. Also, it’s not now so clear that PTTEP will buy Hess’s Thai assets, as Hess seems to have lost interest in selling them. But its share price already reflects diminished expectations—it trades at an 8-year low FY14 PER of 9.6x and a YE14 PBV of 1.5x (~1.5SD below its long-term means). We have cut our profit forecast and our YE14 target price to Bt172 from Bt175. 
Slowing economy making for flattish 1Q14 petro sales …
1Q14 petro sales are likely to be lower than we currently envisage—a similar level to 4Q13’s 299,716boe/d. Management guides that the slowing economy limits demand for gas, while severe weather in Australia has delayed its output expansion plans for the Montara project. Also, the firm realized 3kbd of one-off associated gas at the Vietnam 16-1 field in 4Q13. But we remain confident that the bottom-line will bounce. With a more stable Bt/US$ rate, extra expenses of Bt8-9bn in 4Q13 (FX losses, deferred income tax and G&A expenses) are unlikely to recur in 1Q13.     
…and a lower 2014 petro sales target 
PTTEP has cut its FY14 petro sales target to 325kboe/d from 337kboe/d on weaker gas demand in Thailand, a slowing output ramp-up at Montara and the delayed start-up of the Zawtika project (due to severe weather). The firm has shifted back Zawtika’s COD from April to June. We, however, have adopted a more pessimistic stance—our FY14 petro sales projection falls to 320kboe/d. As severe weather in the area of Australia where the Montara field is situated typically ends in the second-quarter, the current production of 17kbd is likely to prevail into 2Q14, so the field is unlikely to achieve its 25kbd production target; we assume 20kbd.
We also maintain a more conservative assumption on Zawtika gas output, as a production ramp-up typically take several months following start-up. As such, we have trimmed our FY14 NPAT forecast by 5% to Bt63,103m.     
New acquisition necessary, but brownfield fields not in scope
The firm maintains its production target of 600kboe/d by 2020. It expects projects under development (Zawtika, Algeria, M3 and Mozambique) to boost volume to 400kboe/d. Another 200kboe/d will come from the Cash and Maple fields (Australia), Algeria and Mozambique extension projects and new ventures. As such, acquisitions would have to comprise most of the effort to staunch the production decline during FY16-18. Management reiterates that it will focus on operating assets and claims to have sufficient debt capacity to support acquisitions.  
Impairment loss could be potential headwind
PTTEP eased market’s concerns over a potential impairment loss incurred as a result of an asset swap between the firm and its local partner in the KKD project. While it aims to swap 400mboe of 2P with 900mboe of 2C, management believes the value of the 2C asset will trade off against the loss of a producing asset. Nonetheless, under the worst-case scenario, PTTEP guides for a maximum loss of no more than US$100m (5% of FY14 NPAT). The transaction is to go through in May.