PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)
 

Investment thesis: PTTEP yesterday held a conference call to explain its recently announced CAPEX plan. Despite it being long-term positive, we forecast only modest 8 YoY profit growth for FY12, while the big CAPEX jump may make a cash call necessary. Valuation-wise, the recent oil price hike-driven outperformance makes PTTEP look unattractive in relative terms—a one-year forward PER of 12.7x versus 11x for CNOOC, a comparable E&P counter. The current share price also implies a long-term oil price of US$103/bbl, only a 7% discount to the spot price, against a historical average range of 15-20%. In order to factor in the new CAPEX, we have cut our DCF-derived target price to Bt160 from Bt166. We still prefer PTT to PTTEP.  
CAPEX jump means recap risk: The firm ramped up its CAPEX plans for FY12-13 by 52% and 30%, respectively, due to costs related to production capacity expansion at existing fields—S-1, Bongkot and Zawtika (Myanmar)—and exploration of new blocks. While its bigger spending plans will augment its long-term production growth profile, the huge CAPEX plan (of US$3-4bn/year) will also intensify concerns about recap risk. Management said the budget is unlikely to be funded entirely by debt financing. The net debt-to-equity ratio is projected to rise to 0.6x by YE12, above the firm’s policy ceiling of 0.5x. 
Sales volume up modestly; M&As needed to achieve FY16 target of 500KBD: PTTEP trimmed its FY12 petroleum sales target by 7% to 284KBD to factor in a further six-month delay to Montara’s start-up (now slated for 4Q12), while it has upped its FY13-14 targets by 2% and 5%, respectively, to 330KBD and 345KBD, based on the Montara and M-9 projects being commissioned and a production ramp-up at the Bongkot field. Petroleum sales are likely to slow to 326KBD in FY15 and 324KBD in FY16, due to declining production at Vietnam 16-1 and at Montara. M&As will be needed to achieve PTTEP’s FY16 production target of 500KBD, but management declined to elaborate on possible opportunities. 
Cut to FY12 forecast, due to higher interest expenses and write-offs; consensus to follow: In order to factor in the firm’s revised CAPEX and petroleum sales guidance, we have trimmed our FY12 profit forecast by 7% to Bt47,119m. Apart from lower expectations for sales volume, the CAPEX jump will mean higher interest expenses, due to increased debt. Our model suggests that an additional Bt40bn will be funded by bank loans. Also, exploration write-offs are set to rise this year with increased drilling activity. PTTEP guides that it will drill 68 wells this year, up from less than 40 in 2011. As such, we now assume Bt8bn in write-offs, up from Bt6.5bn last year.