PTT

PTT Plc
Investment thesis: While management expressed optimism at yesterday’s analyst meeting that there will be a strong bounce in energy demand once the waters recede, we think a swift recovery is unlikely. As such, we anticipate a contraction in PTT’s 4Q11 core earnings, due to fallout from the flooding. That said, the stock remains one of our two defensive picks within Thai Energy space, as its earnings profile will be the most resilient to the projected oil slump during the next 6 months.
Consequence of the flooding: The firm provided rough guidance on the impact of the flooding on PTT group. In our view, PTTEP will be hit hardest—not only are petro sales likely to decline 5% QoQ to ~250KBD, but the average gas price might drop lower than we previously envisaged, due to reduced gas offtaking from expensive gas fields—Bongkot, Yadana and Yetagun. PTT guided for a 10% QoQ decline in gas sales to 3,794mmcfd; we assume 3,650mmcfd for 4Q11 in our model.
The impact on newly-merged PTTGC will be lighter, though gas feedstock from PTT will decline (because of less PTT offtake from PTTEP)—the firm can switch to Naphtha usage for production. Still, we anticipate margin squeeze—Naphtha is costlier and the firm started exporting more, due to slowing domestic demand. Even though flooding affected oil consumption, TOP seems to be the least-impacted, owing to a petroleum product supply deficit brought about by shutdowns at IRPC, ESSO and SPRC. But we think that the refinery restarts will flip domestic petroleum supply into surplus. That will prompt TOP to export more product in Dec, squeezing its GRM.
Outlook after the flooding: Management said that post-flooding demand for energy will recover strongly, led by petroleum products, such as lubricants, due to needs for oil changes. But we don’t anticipate a swift recovery in PTT’s profit, given the marginal contribution of its oil business. The gas demand turnaround might lag, as the fourth-quarter is low season for power use, while some inundated factories will need months to re-start production.
Unlocking of NGV price cap: The retail NGV price is due to be adjusted up by Bt0.50/kg every month during Jan-Dec 2012. However, PTT will continue to subsidize at a rate of Bt2/kg for tax drivers through govt-issued NGV credit cards. As taxis comprise one-fourth of NGV sales volume, we calculate that the subsidy will diminish from Bt10bn in 2011 to only Bt1.2bn a year. Conversely, PTT said that wholesale LPG price de-control at GSP units would depend largely on adjusting the retail LPG price for households. As such, we believe the chances of LPG price de-control are slim—the govt made populist promises to voters that it must keep.