PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP) 
 
PTTEP’s earnings risks are increasing. Near-term risks have emerged from lower oil prices and rising FX losses in 2Q12. Long-term downside has emerged for its oil-sand project and bid for COVE Energy that could be affected by US shale gas. Price risks could now jeopardise its margins as demand slows and supply remains sufficient. The overhang from COVE bidding should remain and hence we maintain Underperform and target price, based on a 25% discount to DCF (11% WACC, 3% LTG).   
What Happened
We came back from our visit with a negative view on PTTEP’s earnings.Short term, we expect 2Q12 earnings of THB15.2bn, down 17% qoq, on the back of: 1) flat ASPs and volume qoq,
losses from FX and tax adjustments, and exploration write-off expenses.
Long-term risks have arisen not only from its share-price overhang from the COVE bidding but increasingly from its oil-sand project that remains in losses due to poor WTI-linked oil
prices and low production.
What We Think
We remain negative on PTTEP’s earnings given lower oil prices and multiple concerns over its overseas investments (existing oil-sand operation and future COVE acquisition). While volume growth from oil field Montara (+13%yoy) is on track, price risks for this major project could affect earnings in 2013.
What You Should Do
Maintain Underperform on stronger headwinds over the next 3-4 quarters. At 7.4x CY13 P/E, PTTEP is trading at a slight discount to the average for its regional peers, which we believe is
justified given lower earnings visibility and the overhang from COVE.