PTT

We accompanied PTT’s CFO, Mr Wirat Uanarumit, on an NDR to the UK. The feedback was quite positive, making us confident that PTT’s stock price will sustain its outperformance among the group. Fund managers expressed optimism over energy price deregulation. Also, the oil price decline makes it much easier for policy makers to go ahead. Besides, within the group PTT is at the least exposed to earnings downside risk tied to a low oil price outlook, given its stable pipeline tariff structure and as falling oil prices would reduce losses on NGV and LPG. We have rolled over our investment horizon to YE15 with a new DCF target price of Bt400 (our best-case target is Bt456; it assumes that NGV and ex-GSP LPG prices would rise to the costs of Bt15.50/kg and US$480/t, respectively).       

Energy price deregulation just a matter of time…

While the investors still questioned the timeline for price adjustments, they expressed optimism over the govt’s energy price reform, particularly after the recent Bt1/kg hike in the NGV price. The CFO has strong conviction on the govt’s further adjustments (PTT requires other Bt4/kg adjustment to reach break-even)—but the announcement of an exact timeline would ignite public criticism. Truck operators, who comprise about 50% of NGV consumption, are able to absorb fuel cost rises. One issue of concern is a shortage of filling stations. The impacting sector is taxis and public transportations, by which NGV price is still capped at Bt8.50/kg.    

Increasing the ex-GSP LPG price would be harder, due to the three-tier pricing regime—Bt29/kg for industry, Bt22.63/kg for cooking gas and Bt22/kg for transport. Also, the wholesale price level is split between the govt’s importing cost, ex-GSP LPG and ex-refinery LPG. The oil price fall is likely return the govt’s Oil Stablization Fund into balance by end-Oct, which may prompt for price adjustments. Yet, he opined that the regulator is likely to realign the current three-tier LPG consumer price level and later determine how these benefits will flow to the three aforesaid sources of LPG—the initial benefits will be to the govt.      

Spin-off of gas pipeline assets

The investors asked about the rationale behind the gas pipeline spin-off plan. After PTT listed in 2001, Cabinet resolved to boost transparency and allow the third-party access (TPA). The spin-off is due to be completed by 1H15—PTT will initially hold either 100% or 75% (with the MOF holding 25%) in the new entity. TPA will be effective on pipeline extensions. Yet, it appears that it will be very difficult for any third party to actually access the pipeline—they must enter long-term obligations under “Use-or-Pay” contracts with PTT. There are also issues involving procurement ability for cheaper gas sources and energy security with gas offtakers in comparison with PTT.                  

Group restructuring and long-term growth outlook

PTT intends to divest two refining assets, SPRC and BCP, during 1H15 (which could enable it to acquire ESSO—if EXXON finally decides to exit its Thai refining asset). PTT is also considering merging IRPC and PTTGC, once IRPC’s Phoenix projects are completed. A regular topic at the meetings was PTT’s long-term growth outlook. Apart from an expanding gas network, rising LNG imports and renewed gas exploration in the Gulf of Thailand (after 2022), the CFO guided that overseas expansion will be a growth engine with a focus on E&P. It is looking to co-invest with PTTEP in big projects in order to eliminate cash call risk for PTTEP.