PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)
 

Above estimate: PTTEP unveiled a record profit for 1Q12 of Bt18,288m, up by 21% QoQ and 67% YoY. The result was 14% higher than our expectation and 16% above the Bloomberg consensus, due to lower income tax than modeled. In 1Q12, the effective tax rate was only 29%; our estimate was 39%.
Results highlights: As the greenback is PTTEP’s functional currency, baht appreciation against the dollar meant higher net asset values and increased depreciation expenses in dollar terms, which meant lower deferred income tax liabilities, according to the firm (if the baht had depreciated, deferred tax liabilities would have increased).
On the operational front, PTTEP posted petro sales volume of 253,411boe/d, up from 250,848boe/d in 4Q11. But the number was a little short of our estimate of 256KBD, which casts doubt on the achievability of the firm’s FY12 target of 284KBD. Its reported ASP of US$64.79/boe was as expected, up from 4Q11’s $61.3/boe. DD&A expenses also spiked to $14.1/boe from $11.6/boe in 4Q11 on extra decommissioning costs for the Jabiru and Challis fields in Australia. 
Outlook: Despite the 1Q12 earnings surprise, we have subdued expectations for 2Q12. The maintenance shutdown schedule for key gas projects is heavy—Arthit, Bongkot, Yadana and Yetagun—so the prospects for petro sales hinge on the start-up of Bongkot South (originally slated for June). PTTEP’s gas sales prices rose further at the April adjustment review, but the forecast retreat in oil prices might negate the effect of the gas price hikes.
What’s changed? We maintain our FY12 profit projection of Bt49,947m unchanged. The risks to our model are: 1) oil price fluctuations, 2) an FX loss as a result of Canadian dollar depreciation against the greenback, 3) lower petroleum sales and 4) increased exploration write-offs.   
Recommendation: Despite PTTEP’s buoyant long-term production outlook, our HOLD rating stands. The current valuation doesn’t offer a favorable risk-reward trade-off. Oil prices are likely to slip in 2Q12, so forward earnings will tend to decline. While concerns about equity dilution are largely priced in, we feel that that there are execution risks related to project developments, as any new acquisitions would require heavy CAPEX and take considerable time to develop commercially. We still prefer PTT to PTTEP.