PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

 

Investment thesis

With the deeper-and-longer oil price downturn, we turned out to be too optimistic on PTTEP and so have downgraded our TRADING BUY call to HOLD. We admitted its cheap valuation—in which the current share price is trading below our most conservatively adjusted BV of Bt62/share (please refer to our 16 Dec report, Worst-case oil already in the price!). However, we don’t expect any meaningful price appreciation either, at least through 1Q16, given that the prevailing oil price downturn will cloud its price performance. Besides that, the forecast decline in forward earnings will also reduce investor interests in the stock. With respect to our recent earnings cut, we trimmed our DCF-based TP to Bt60 from Bt75 previously.   

Gains boost 4Q15 bottom line, but core extends weakness … 

Despite the oil price downturn, PTTEP will likely post a positive earnings surprise for 4Q15. Oil hedging gains and deflated tax expenses following the more stable Baht (after its high mark at end-Sep THB/USD) will boost its bottom-line number. We anticipate a profit of Bt3.7bn versus a recorded loss of Bt46.2bn posted for 3Q15. However, falling the oil price with the plus of the lower gas price adjustment in Oct will squeeze the firm’s ASP; we estimate US$40.85/boe, down from 3Q15’s US$44.55/boe. This pull-back would heavily dent its core profit to the tune of Bt1.6bn versus Bt5.4bn in the prior quarter, albeit on slightly improved petroleum sales.  

… but bottom line may fall back into red again in 1H16 

Morgan Stanley didn’t expect any meaningful upturn in oil prices in the next six months. If such were to be the case, PTTEP’s six-month forward profitability would tend to decline and possibly fall into the red. Assuming that oil prices remain around the current level during 1H16, we anticipate ASP for 1Q16 to retreat close to the level of its break-cost of US$38-39/boe. In a greater extent, a lower gas price adjustment in Apr would squeeze ASP further for 2Q16—we preliminarily anticipate ~US$34/boe, which will definitely prompt a bottom-line loss. Additionally, prevailing currency risk will still provide scope for an earnings downside, in our view.         

Forecasts scaled back on lower oil price expectations

Fine-tuning with MS’s downwardly revised Brent price assumptions to US$42/bbl for 2016 and US$48/bbl for 2017 (from US$49 and US$75 respectively), we have slashed our NPAT projections by 57% to Bt6.2bn for FY16 and a further 67% to Bt13.7bn for FY17. Apart from the oil price, further THB/USD weakness will also risk to our forecasts; we currently assumed Bt35.7/US$ for FY16—every Bt1 depreciation will squeeze our FY16 estimate by Bt600m. 

New acquisition—a scope for upside, but remains to be seen 

PTTEP is looking to buy a 22.22% stake in the Bongkot field from British Gas—the deal is expected to be finalized within 1H16. 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. While PTTEP has a majority stake of 44.45% and also operates the field, a large number of competitive bidders made us feel that it would be premature to announce a landslide victory over the stake at present.