PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)
 

What's news? On last Friday, PTTEP announced a Bt98bn recapitalization. It will issue 650m new shares, which will increase its issued paid-up stock to 3,970m shares from 3,320m. Of the total, 62% is allocated to PTT; 33% to a public offering (PO) and the remaining reserved for a greenshoe option. According to its press release, PTT’s shareholding in PTTEP might be diluted slightly to no less than 64.75% from 65.28% currently. The PO price will be determined by book-building; the timeline has yet to be finalized, as the firm requires shareholder approval for the plan. It will hold an EGM on Aug 24—the registration deadline for voting rights is Aug 6. 
Target price cut 7% and forecasts trimmed slightly: We have incorporated the firm’s recapitalization plan and purchase of Cove Energy (which should be completed by Aug) into our model. Assuming interest expenses of US$1bn in debt financing and financial advisory fees, we have trimmed our FY12-13 profit projections by 1.4% and 0.8%, respectively. Coupled with a dilution effect of 16.4% from its recap plan, our PTTEP DCF target price falls to Bt168 from Bt180 previously.
Why not an RO? The firm’s planned allocation process through a PO was a surprise (as we and the market had long assumed a cash call through a rights offering [RO]). PTTEP said during the conference call that an RO would take too long. The reason? US investors currently hold around 10% of PTTEP. So if the firm were to offer subscription rights to American shareholders (which it must do under Thai SEC rules), US SEC rules would require it to file to the US SEC, which has arduous reporting procedures. Those rules don’t apply for a PO.
PO = RO-by-stealth: Management eased market concerns about the risk of share dilution. The firm will allot the PO shares in the same proportions to existing shareholders as it would have allotted RO shares. Based on that assumption, its recap plan implies an allotment ratio of 5.37 old shares to one new share for existing minority shareholders, based on the XR date (the timeline has yet to be determined). Unsubscribed PO shares will be reallocated. PTTEP said that under the worst-case scenario where the new shares are not fully subscribed, it might put its cash call on hold. 
D/E ratio to fall to only 0.1x—but still not enough for 900KBD target: With its Bt98bn recapitalization, the post-Cove purchase net debt/equity would fall sharply to 0.1x from 0.3x at end-March. Several clients asked us whether the recap plan and stronger balance sheet would accommodate PTTEP’s 2020 production target of 900KBD. The answer is “No”, in our view.
Using the current benchmark development cost of US$10-13/boe for gas assets, we calculate that its balance sheet and projected operating cash flows would at the best support the medium-term production target range of 500-600KBD by 2016. That calculation, however, doesn’t allow for any expenses related to a new acquisition (see our 5-year projected cash flow and balance sheet—pre- and post-2016 production target—in Figures 1 & 2).     
Recap overhang resolved—but short-term dip still likely: Although the confusion over the recapitalization has lifted, we tactically remain short-term negative on stock for the following reasons. First, the current share price is not at bargain—fully-diluted FY12 PER of 11.8x; for instance CNOOC’s PER is only 9.9x. Second, the recapitalization will take months—the timeframe for XR and book-building will be set once the EGM has voted on the recap plan on Aug 24; it typically takes 2-4 months. As such, we don’t see any rush for investors that want to participate in the PO.
Third, there may be a sell-off among foreign investors—offshore players currently hold more than 25% of PTTEP, while Thai investors hold less than 10%. Fourth, as the recap plan is aimed at enabling long-term growth, we think the market will probably discount the current share price to offset the near-term opportunity loss. As such it appears to make sense to focus on the value of PTTEP’s existing assets—we derived an ex-Montara ex-Cove DCF value of Bt152/share—which is close to the firm’s implied offering price, based on its recapitalization plan.    
What if we were wrong? With its PO-by-stealth plan, some people may argue that the share price shouldn’t be affected, as existing investors would maintain proportionate shareholding by subscribing to the new shares. In our view, the stock price would track sideways at best. It’s still too early to price in Montara—management guided that the start-up date will probably slip further to late 4Q12. The XR date is still some way off; perhaps the market should adopt a wait-and-see stance till the cash call plan is approved, in our opinion.