GLOW Energy

GLOW Energy Plc (GLOW)
Investment thesis: While we have a bearish view on 2Q12—due to a surge in gas costs and revenue lost because of further slippage to Gheco-One’s start-up—the prospects for 2H12 earnings are good. Historically, a dive in oil prices has presaged lower gas costs, while the Ft charge tends to rise, which would be a boon to forward profitability. In the interim, we see the delay to the start-up of Gheco-One as simply a short-term hiccup; the project will boost long-term earnings once it starts operating.
Further delay to Gheco-One’s start-up to squeeze 2Q12—trough for the year … We are now less optimistic about GLOW’s 2Q12 outlook than before; it looks set to be the trough of the year. Revenue lost because of further slippage to Gheco-One’s start-up and associated expenses incurred as a result of the delay will squeeze earnings. We now assume that the plant will commence running in 3Q12 (we previously assumed May). Note that the contractor is not liable to pay further compensation for the delay.  
…but it’s just a matter of time: At this moment, GLOW can’t confirm a new COD. Gheco-One is currently in the final stages of test-running with EGAT. Management said the plant has yet to pass EGAT requirements, but expects the issue to be resolved soon. We remain optimistic about the project. Given rising national power demand, EGAT is likely to allow the plant to start up fairly soon—the peak power reserve margin in April was only 17% (15% is considered a safe margin) and coal is by far the cheapest fossil fuel source for generating electricity.
Declining gas costs around the corner … Given the dive in oil prices since April, we anticipate that GLOW’s gas costs would have peaked in 2Q12 and will tend to fall in the quarters ahead, particularly in 4Q12—most of the key gas fields in Thailand are scheduled for gas price adjustments in October. Our stress test indicates that every 10% decline in gas cost (in Oct) would boost our FY12 profit forecast by 2% and our FY13 number by 9%. 
…and an Ft rise would boost 2H12 outlook: The Ft rate will tend to rise further in 2H12, as oil prices have fallen (EGAT tends to try to smooth over electricity prices when fuel source prices jump, then increase the Ft rate when fuel source prices fall). EGAT cited that it needs to raise the Ft charge by Bt0.08/unit in each of the next four scheduled reviews in order to cover for higher gas and fuel oil costs during the fuel source price spike. We calculated that every 10% increase in the Ft charge would boost our FY12-13 profit projections by 0.5% and 1.7%, respectively.