PTT

PTT Plc

Investment thesis: Last week, we accompanied PTT's EVP of Finance, Wirat Uanarumit, on an NDR to the UK. In all, we sensed renewed investor optimism about commodity stocks. Given current valuations, the risk-reward trade-off has improved. Fund managers are now focused on mid- to long-term growth, rather than short-term hiccups. Within O&G space, Petrochem stocks are most popular. The key discussions are summarized below.
Gas supply situation and new growth platform: PTTEP aims to expand exploration and renew concessions for existing blocks in the Gulf of Thailand that are due to expire. Furthermore, PTT is looking to double the capacity of its LNG receiving terminal facilities, given that the current 5mtpa capacity is expected to be fully utilized within four years. Myanmar is the group's new growth platform—the firm has developed a more comprehensive blueprint.
Group restructuring and asset re-balancing: PTT is rebalancing the group's asset portfolio. Its upstream exposure isn’t sufficient, but it has a decent mid- to down-stream presence. As such, the emphasis is upstream, mainly gas assets. PTT is looking to trim refining capacity through stock dilutions in SPRC and BCP. IRPC may be merged with PTTGC, but a deal could be some years off. It will also realign non-listed chemical units and merge them with PTTGC.
PTTEP—takeover bid for Cove Energy & recap: PTT declined to comment on PTTEP's Cove Energy bid, save to say that the asset fits with the group's strategic focus. PTTEP is envisaged to supply 50% of Thailand's gas consumption by 2020, up from only 20% currently. That translates into a production target of 900KBD. The revised PDP version also puts pressure on PTT group, as gas demand will rise markedly over the next 10 years.
PTTGC—gas pricing issue: Mr Wirat said the issue needs to be sorted out as soon as possible, hopefully this year. The revised price range will be adequate for the future and will take into account any new investments in order to avoid frequent readjustments. He also said that one-third of the gas from the Gulf of Thailand (which has been under-utilized) will be fed into PTT’s GSP units in order to supply feedstock for PTTGC's de-bottlenecked facilities.
Energy price deregulation: PTT is optimistic that the govt will resume increasing the price of NGV (starting August) after it had earlier directed the firm to freeze the price, May-July. The govt has already revised up the price of LPG for industrial and transport use, but it remains far below the prices in neighboring countries. Mr Wirat said that the establishment of the AEC in 2015 will force for the govt to allow market prices to prevail for all types of energy.
Key takeaways from NDR in UK
Last week, we accompanied PTT's Executive Vice President of Finance, Mr Wirat Uanarumit, on a non-deal roadshow to the UK. The most frequently asked questions concerned PTTEP's takeover bid for Cove Energy and PTTGC gas pricing issues. Other key discussions touched on the gas supply situation over the medium- to long-term, energy price deregulation and further restructuring plans for the group.
In all, we sensed that the investors we met were more positive about commodity stocks than they were when we last visited in May. Cheap valuations have meant that the risk-reward trade-off has improved. Fund managers are now focused on medium- to long-term growth profiles rather than short-term hiccups. Within O&G space, Petrochemical stocks are of the most interest in anticipation of chemical spread rebounds brought about by a Chinese demand recovery in the face of exceptionally low chemical inventories. However, we think the timing for re-entry would be after 2Q12 results are released—there are likely to be huge stock losses and consensus earnings forecast downgrades this month. The key discussions during the trip to the UK are summarized below.
Gas supply situation and new growth platform
As 1P gas supply will last till 2024, while 2P gas will sustain the current production level for another 20 years, PTTEP aims to expand exploration and renew concessions for blocks in the Gulf of Thailand (some are due to expire soon). Furthermore, PTT is looking to double the capacity of its LNG receiving terminal facilities, given that the current 5mtpa of capacity is expected to be fully utilized within four years. It first needs govt consent to go ahead, particularly on an agreed return on the investment, as a receiving terminal would be considered a component of gas infrastructure.
Myanmar is the group's new growth platform—PTTEP is the second-biggest investor in the country. PTT has developed a more comprehensive blueprint for upstream, midstream (gas separation plants, etc) and down-stream (refineries, petrochemicals, etc) areas of group operations.
Group restructuring and asset re-balancing
The conglomerate is rebalancing its assets; the upstream operation is insufficient, while exposure to mid- to down-stream areas is substantial. As such, the prime emphasis will be on upstream, particularly on gas assets. PTT is looking to trim its presence in refining through stock dilution in SPRC and BCP, as it has too big a share of Thailand’s refining capacity, it believes. IRPC may eventually be merged with PTTGC, but not within the next few years. Non-listed chemical units will be folded into PTTGC, but there is as yet no clear timeframe.
PTTEP—takeover bid for Cove Energy and recap potential
Mr Wirat declined to comment on PTTEP's attempt to buy Cove Energy, save to claim that the asset fits with the group's strategic focus. PTTEP is targeted to supply to 50% of Thailand's gas consumption by 2020 from 20% currently. That translates into 900KBD in eight years from now. The revised PDP has also put pressure on PTT group, as gas demand will rise significantly over the next 10 years for power generation. The mandate for the group to procure more gas for Thailand is a tough one. He said PTT will provide full financial support, would seem to imply that the firm would maintain its current percentage shareholding in PTTEP if it were to make a cash call.
PTTGC—gas pricing issue
One of the most frequently asked questions at our meetings with investors in the UK was the timeline for concluding a deal on extra gas feedstock for PTTGC's expansion project. Mr Wirat said the issue needs to be sorted out as soon as possible, hopefully before the end of the year. He claimed that the rationale for adjusting the price formula is to ensure a fair return for both parties, as the price of oil is consistently higher than the upper bound of the US$40-80/bbl range under which the existing formula was set. The revised price range will also take the possibility of new investments into account in order to avoid frequent adjustments.
Mr Wirat also said that one-third (or ~900-1,000mcfd) of the indigenous gas from the Gulf of Thailand, which has been under-utilized, will be fed to PTT’s GSP units in order to supply feedstock to PTTGC's de-bottlenecking facility. Natural gas from Myanmar/imported LNG will be fed to utilities plants and industrial users.

Energy price deregulation
NGV and LPG price de-control was also a subject of interest to investors. PTT is optimistic that the govt will allow NGV price increases (starting August) after it directed the firm to hold prices flat, May through July. With regard to LPG, the govt has already revised up prices for industrial and transport users to Bt30/kg and Bt21/kg, respectively, but the price for cooking gas remains capped at Bt18/kg. Those prices, however, are still far below those of neighboring countries, where prices generally range Bt40-50/kg. Mr Wirat believes that the arrival of the ASEAN Economic Community (AEC) in 2015 will force for the govt to adopt market pricing for all energy products, otherwise Thailand would risk subsidizing prices for much of the region.

Financial position and dividend policy
PTT group has a 5-year CAPEX plan of US$30bn for FY12-16—41% is reserved for upstream operations, not including possible acquisition opportunities. Despite the scale of the investment budget, the group’s internal cash flows can support it and continue payinig dividends. Mr Wirat said the group’s cash flows from operations approximate $9bn per annum and debt headroom remains ample. As such, it could pay up to 45% against the 40% posted for FY11. PTT aims to manage either a payout percentage or an absolute dividend of not less than the previous year, whichever is higher.
Recommendation and valuation
Maintain BUY with unchanged DCF target price of Bt384: PTT remains our preferred pick among Thai O&G stocks at this moment. The prospects for its gas throughput are good, with gas sales driven by a growing economy and increasing use of gas as a feedstock for power generation. An anticipated rebound in chemical prices and spreads by late 3Q12 would be a boon for its GSP performances. More importantly, the likely resumption of NGV price increases could potentially catalyze the share price, as concerns about PTT’s implicit fuel price subsidy would ease. Valuation-wise, the stock trades at undemanding multiples—an FY13 PER of 7.3x and a PBV of 1.2x, in line with their respective long-term means. Additionally, the stock is steeply discounted to regional counters—a YE13 PBV/ROE of only 0.06 versus a 0.08x Asian mean.