PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

Investment thesis
We are confident that PTTEP’s share price will rise further. Despite another delay to Zawtika’s start-up, the NPAT profile is for QoQ growth in 2Q14 and HoH growth in 2H14. Recent baht appreciation will be net positive for the bottom-line. The stock trades at an FY14 PER of 11.2x (near its long-term mean) and a PBV of 1.7x (a historically low valuation level).
Petroleum sales may fall short of target …
Our recent talks with PTTEP make us suspect that petro sales will miss the FY14 target of 330kboe/d—we expect it to achieve 320kboe/d at best (we had conservatively assumed 314kboe/d). The start-up date for the Zawtika field has slipped further to late Sept from early August (we assume COD by Oct). The onshore metering station is currently being built; a 1- or 2-month test run will follow. A new gas project typically takes several months for a full capacity run. On the Montara front, oil output has been stable in the 20-23kbd range. Further upside is very unlikely (PTTEP initially targeted 30kbd oil output from the field); the H-5 development well was abandoned. 
…but earnings uptrend intact—stronger 2Q14 expected …
We estimate 2Q14 NPAT expansion of 19% QoQ and 39% YoY to Bt14,777m. The return of fields from shutdowns and contributions from the recently-acquired Thai assets of Hess Corp will have boosted petroleum sales to a new high of 311kboe/d. ASP would also have risen, backed by higher oil prices and lower proportionate sales of cheap Vietnamese gas. Concerns over the impairment on KKD asset swaps has ebbed, as PTTEP said none of this non-cash expense is to be booked to the quarter. Those twin factors should have outweighed the effect of soaring exploration write-offs (the firm guides for US$30-40m versus $1m in 1Q14) and higher DD&A expenses tied to expanded Montara output and Hess’s Thai assets. 
… 2H14 outlook for HoH growth
Despite the delay to Zawtika’s start-up, PTTEP’s earnings should resume an uptrend in 2H14. Our model suggests Bt16.2bn/quarter versus 1H14’s Bt13.6bn/quarter. Bongkot’s return from a 14-day shutdown during 2Q14 and full-quarter realization of income from Hess assets will boost sales volume further in 3Q14. We expect sales volume to peak for the year in 4Q14 with Zawtika operational. There may be scope for gas price upside from the upcoming scheduled adjustment review in October, which we expect to factor in higher YTD oil prices. Zawtika’s start-up will also boost its gas price—the field’s gas price is US$12/mmbtu versus a Gulf of Thailand pooled price of about $8/mmbtu.
Intensified risk of write-offs—but already in the model
Exploration write-offs on dry wells are likely to rise in 2H14. Two expensive exploration projects—Sunbird in Kenya and Maple East in Australia—could be at risk, PTTEP guides. The two fields’ exploration costs total US$120m versus US$30-40m in 1H14. We have already incorporated the cost into our model. On positive front, recent baht appreciation will boost PTTEP’s bottom-line. Our analysis suggests that for every Bt1/US$ of baht appreciation there would be about 1.5% upside to our PTTEP FY14 NPAT projection.