PTT Exploration & Production

PTT Exploration & Production Plc 

 

Investment thesis

While the oil price will likely remain elevated through 1H16, we believe PTTEP’s current valuation has factored in the worst-case oil scenario. After an extremely heavy sell-off in the stocks in tandem with the oil price, we are convincing investors to look back at P/BV valuation rather than the P/E multiple (which is still elevated during the sub-par earnings trend). The stock price is trading at only 0.6x P/BV, a low bound of the oil price down-cycle; and also below our most conservatively adjusted BV of Bt62. With an improving risk-reward proposition, we raise our rating to TRADING BUY from HOLD with the downwardly revised TP of Bt75 (from Bt82). 

CAPEX revised down, but petroleum sales target still intact

PTTEP unveiled a 30% cut in 5-yr CAPEX during 2016-20 (from US$3.2bn/year to US$2.2bn/year). The revised number incorporated development costs of Contract 4, Myanmar M3 and Mozambique—all of which expect first output by 2020. The big cut was unsurprising, as the firm realigned itself with the low oil price environment. Based on our FY16 Brent assumption of US$49/bbl, we anticipate a yearly OCF of US$2.3bn—which would service the annual investment budget. But the plan seems flexible in the case that oil falls back below US$40/bbl. If that happens, we see a maximum 35% cut without any impact on its production profile over the next three years. On volume, 5-yr petro sales target was largely as expected. The output will slide through 2018 before a contraction in 2019—which conservatively factors in the nearly expired Bongkot field concession and declining production from its Montara, Yadana and Yetagun projects.  

Lower oil trimmed forecast down with large earnings swing …

In sync with MS’ lower Brent price assumption for 2016 to US$49/bbl (from US$55), we slashed our FY16 NPAT projection 28% to Bt14.7bn. Despite that, next year’s earnings would have been highly volatile—our earnings sensitivity analysis based on MS’ bear-to-bull scenarios of US$39 and US$62/bbl indicated large earnings swings of -80% to +104%. The low oil environment will likely be followed by a spike a year later due to dynamic supply response and consistent demand growth—MS revised up its Brent price assumption for 2017 to US$75/bbl (from US$65), raising our 2017 NPAT estimate by 39% to Bt41.4bn.      

… but potential acquisition to mitigate against downside 

PTTEP’s cash on hand of US$3bn would easily facilitate any sizable acquisition in the foreseeable future. According to our industry source, British Gas announced plans to divest its upstream assets in Thailand—of which it has a 22.22% interest in the Bongkot field. As PTTEP has a majority stake of 44.45% and also operates the field, we believe the firm has the greatest potential to buy out the stakes from British Gas. Based on our preliminary estimate, the acquisition would boost PTTEP’s petroleum sales 24k boe/d a year and our earnings estimate by Bt2.2bn annually. 

What’s in the price?

The sharp contraction in PTTEP’s share price improves the risk-reward proposition for re-entry, in our view. The current valuation has priced in the worst oil scenario and more impairments against all underdeveloped and oil assets. Assuming that the firm totally writes off those assets, particularly Montara, the Canadian oil sands, Natuna in Indonesia and its Mozambique effort, of which the remaining book values total US$3.6bn; and also with the Brent price sustained at US$20/bbl through 2016, we calculated the firm’s adjusted book value of Bt62—still higher than today’s share price.