PTT Exploration & Production Plc

PTT Exploration & Production Plc (PTTEP)
Positive development underscores top pick. After meeting with management, PTTEP remains our top pick for the sector with a near-term favorable oil price and higher sales volume from the startup of new projects and newly acquired assets. Earnings will grow now that Zawtika gas is being sold to Thailand. Current valuation looks tempting at only 10.1-10.3x 2014-15 P/E, below historical average of 12-13x
(-0.6SD). We see upside risk from the current high oil price. Dividend yield is estimated at ~4% for the next two years. Our DCF valuation supports the TP of Bt210 and we confirm our BUY rating.    
Highlights from the meeting:
  Gas sales from Zawtika (M9) to Thailand started in early August with production ramp-up to reach contracted volume of 240mmcfd reached within a few days. Management says gas sold from this field has to be stepped up gradually in order to avoid a sudden change in the average heat rate of gas from Myanmar fed into power plants, mainly those of RATCH, as it has to blended with gas from Yadana and Yetagun. The pricing formula should also be similar to Yadana and Yetagun at US$11-12/mmbtu vs. ~US$8/mmbtu for gas from the Gulf of Thailand. The delayed startup from April this year will cost PTTEP a 25% discount on gas sold to PTT for four months. We have put this into our earnings estimate.  
  With the August startup of gas sales of Zawtika to Thailand, management is confident that its target10% sales volume growth for 2014 will be achieved. PTTEP expects average sales volume for 2H14 to increase to 330kBOED in 2H14 from 307.3kBOED in 1H14. This implies full-year average sales volume of ~319kBOED, up from 293kBOED in 2013.
  More E&P is planned in Myanmar to increase the upgrade potential for its 2P reserves. This includes more appraisal wells at Zawtika and exploration wells for PSC-G and EP-2, and M3.
  The LNG project in Mozambique is on standby until the government issues a decree that will protect the return on investment; once this is done, it can proceed to the financing stage with a final investment decision made by mid-2015. The project operator, Anadarko, is negotiating with the Mozambique government to revise details of the decree to ensure a secure return on investment. Management expects this decree to be finalized within 1-2 months before the country’s parliament term ends in September this year. PTTEP has no intention of upping its stake in this project from the current 8.5% - at least until the project starts up, expected in 2018-19. Management guided that this project’s 2C resources could be 40tcf to 60tcf higher than initially estimated.