PTT Exploration & Production

·         3Q11 core earnings up 6% q-o-q, thanks to lower write-off expenses

·         Sales volume should be weak in 4Q11 due to falling liquid sales volume at S1 and expiry of Arthit North

·         Maintain HOLD, Bt165 TP. Capital increase plan weighing down on stock sentiment

Comment on Results

3Q11 highlights. PTTEP reported net profit of Bt7.45bn, down 33% q-o-q and 30% y-o-y, due to FX loss (at Bt5.5bn, majority coming from USD loan at subsidiary in Canada, where the currency strengthened against Canadian). Excluding extraordinary items, core profit was Bt12.8bn, up 6% q-o-q, thanks to lower write-off expenses. PTTEP booked write-off expenses of US$28m in 3Q11, against US$52m in 2Q11. Sales volume was 265k boed, flat y-o-y but down 3% q-o-q, due to shutdown at Bongkot (15 days, 44.4% owned) and lower production volume at Arthit and Arthit North. Average selling price was US$55.4/boe, down slightly from US$56.28/boe in 2Q11.

4Q11 sales volume should be weak despite production ramp-up at KKD and Vietnam 16-1. Production volume is rising for KKD to 14k bbd (7.6k bbd in 2Q11) and for Vietnam 16-1 (28.5% owned, commercial Aug 2011) to 35k bbd. However, we expect sales volume at onshore S1 project (100% owned) to decline due to the floods (potential impact up to 2 months) and also the expiration of Arthit North (100% owned) in Nov 2011. Further, PTTEP is exploring 3 wells - 1 well in Thailand and 2 wells in Australia - with exploration expenses of US$50m. We see downside risks if these wells turn out to be dry wells.

Recommendation

Maintain HOLD, Bt165 TP. We are in the process of revising down our oil price assumption next year, which should lower PTTEP’s earnings. Potential capital increase is also weighing down sentiment on the stock.