PTT Exploration & Production

Preview 3Q14F: hurt by write-offs and oil price BUY

PTT Exploration & Production Plc (PTTEP)

Still BUY despite TP cut. PTTEP’s share price has come down 7.3% over the past two

weeks against a 5% rise in parent company PTT, reflecting investor anxiety over the

effect of the 5.2% fall in oil prices over the same period. Though the hit caused by the

fall in oil price on 3Q14 profit may extend into 4Q14, we feel the market has been

overly pessimistic, since share prices for other regional E&P companies fell only 1.2% on

average in the same period. We have cut this year’s forecast by 10.3% but this still

represents growth of 5.4% YoY; this also leads to a cut in our DCF-based TP to Bt200

from Bt210. We still BUY on attractive valuation of 9.5x P/E for 2015 (-0.7SD).

3Q14F plunge (released Oct 30). We expect a 37.4% drop in net profit QoQ and 36.1%

YoY to Bt11.4bn, lower than earlier expected. We learned it may write off US$110mn

exploration expenses for two wells - Maple East in Australia and a deepwater well in

Kenya. We note that the depth of the fall QoQ is largely due to the 2Q14 gain from the

Canada oil sand asset swap. The fall in oil price probably also contributed to the fall,

though this is partially buffered by hedging via financial instruments.

Zawtika could be key driver for sales volume. Sales volume is expected to inch up

1.6% QoQ to 320.8kBOED after Zawtika in Myanmar commenced operations in early

August. According to management, production at Zawtika has been smooth since

startup, with daily production of 300mmcfd as planned. This will, however, be offset by

planned shutdowns of Bongkot South and Montara. The latter has reduced production

by 20% from 2Q14. Sales volume growth should remain strong at 12% YoY thanks to

the startup of Zawtika and the newly acquired assets from Hess, chiefly the 15%

interest in Pailin gas field.

ASP hurt by lower oil price. We estimate a fall of 3.3% QoQ and 0.4% YoY in average

selling price (ASP) to US$65.45/bbl as a result of lower oil price. This affects ~32% of its

3Q14 sales volume of crude oil and condensate. Fortunately, the selling price of its gas

portion (~68% of total volume) was maintained QoQ at US$8+/mmbtu. Normally, more

stable gas prices help support ASP when oil prices are weakening. PTTEP also hedges

70% of liquid volume to protect the bottom line from weaker than expected oil price.

Outlook for 4Q14F. Lower exploration expense and higher sales volume QoQ from a

full quarter of operations at Zawtika will boost 4Q14F earnings. We expect the

continued weak oil price to bite into profit in the last quarter but seasonality of higher

oil price in winter is expected to support oil price in the near term.

Earnings forecast revision. We have lowered our 2014F net profit estimate by 10.3%

to reflect the lower ASP caused by lower oil price. This has reduced our assumed ASP

by 2.8% to US$64.89/bbl. We also trimmed our sales volume assumption by 3.5% to

313.3kBOED, implying a growth rate of 7.2% YoY, down from 11% previously.