PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

Investment thesis
While PTTEP’s FY14 profit growth profile is modest, due to lower petro sales and heavier extra expenses assumptions, we think the market has already priced this in. The stock trades at an FY14 PER of only 10x, on a par with its long-term mean. The 2H14 outlook is for a notable HoH improvement, once Montara’s production ramps up and Zawtika starts operating. The likelihood of PTTEP winning Hess’s Thai assets (management is now more optimistic about a deal) would potentially catalyze its share price. 
Petroleum sales may short of target …
Our recent talks with PTTEP made us feel that petro sales are likely to miss the FY14 target of 325kboe/d (we had assumed 318kboe/d). Montara’s two development wells (“H-5” and “Sweep North”) have had technical problems. Sweep North might start pumping oil in July, at the earliest, but H-5 is uncertain. Under the worst-case scenario, Montara’s oil output would be scaled down to 17kbd from 25kbd—our base-line scenario assumes that the commencement of Sweep North will boost output to 20kbd. One positive factor is that the Zawtika field’s COD moves forward to May (with scope for upside to 350mmcfd from 300mmcfd if Myanmar raises its gas offtake).     
…  forecasts cut further—street to follow
We have trimmed our FY14-15 NPAT projections by 5.7% and 1.2%, respectively, to Bt59,483m and Bt67,297m, due to lower Montara oil output. Assuming that H-5 is abandoned, our FY14-15 petro sales assumptions decline by 1% each to 318kboe/d and 344kboe/d, respectively. We have factored extra expenses of US$60m for the H-5 well and an impairment of $35m on KKD asset swaps into our FY14 model. We also model for an opportunity loss from Zawtika’s discounted gas price totaling $24m (the field is obliged to sell gas to PTT at a 25% discount during the volume shortfall period—about two months—before ramping up to DCQ volume).
Diminished expectation for 1Q14; 2Q14 likely to be flat, at best
With a more stable Bt/US$ and normalized OPEX, we expect 1Q14 NPAT to bounce 66% QoQ to Bt12,336m (but down 39% YoY). But that would still be 14% below our earlier forecast, due to recognition of extra expenses on the H-5 development of US$60m and FX losses of $25m, which would outweigh the effect of lower deferred income tax of $32m as a result of baht appreciation. The 2Q14 number is likely to be flat or down QoQ, mainly due to the impairment on the KKD asset swap (PTTEP guides for $35m or less). Also, petro sales will decline with the shutdowns of the MTJDA and Bongkot fields during the quarter and oil prices will be subject to seasonal slippage.  
Acquisition of Hess’s Thai assets the key variable
PTTEP is again optimistic that Hess will agree to sell its Thai assets and expects a final deal by June. If it were to win the bid, the stakes in the Pailin and Sinphuhorm fields would make for an accretion of 18kbd a year (~2.8% and ~5.2% of the FY14-15 sales targets on a pro rata basis). We assume that the price would be in the range of US$1-1.5bn, which PTTEP aims to finance with cash on-hand. That would boost our FY14-15 NPAT forecasts by 2.9% and 4.6%, respectively, and our DCF valuation by Bt5-9/share.