PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

What's new? PTTEP yesterday told the press that it has postponed its EGM, which was scheduled today. Management will set a new timeline at the next board meeting in 45 days.
Why the delay? Following a conference call with PTTEP executives, we feel that the delay was about a time management rather than the failure of its recapitalization plan. The firm had only a month between its announcement of a cash call and the EGM date. In the meantime, there are many issues to explain to investors, particularly foreign investors, which hold more than 25% of PTTEP.
CEO, Mr. Tevin Vongvanich, said that shareholders he met during a recent deal roadshow expressed concerns about the structure and size of the recapitalization, the acquisition of Cove and further fundraising needs if the firm is to achieve its production target of 900KBD (he, however, claimed that the feedback was mostly positive). As such, the firm realized that more time is necessary, as 60% of PTTEP’s shareholders have yet to be addressed by the firm about the relevant issues.
Structure of recapitalization under review? In our view, the most troubling issue for minority shareholders is probably PTTEP's defacto RO structure (or “preferential PO”). This initially raised concerns about the possibility of some shareholders receiving preferential treatment over stock allocations—the firm took two days to clearly explain the features of the PO to Thai investors. It's worth noting that approval of the structure of the recapitalization and book-building methodology will require a yes vote by 75% of the non-PTT shareholders that attend the EGM. Executives said that the firm may review the current structure to realign it to take concerns into account, particularly with regard to American shareholders.
What if recap structure is changed—further delay likely? At this stage, PTTEP still targets recapitalization before YE12. But based on experience of the timeframes of previous procedural amendments, we suspect that the cash call date is likely to slip back to next year, following the start-up of the Montara field in Australia. There would be pros and cons to such as date, in our view. If Montara becomes operational as scheduled, it would boost sentiment toward the recap plan and the stock. But if Montara’s commissioning were to be delayed further, the cash call might conceivably be derailed. More interestingly, the shift in the recap structure back a traditional RO would possibly push the plan further into the future, we believe, due to the time-consuming procedures required by the US Securities & Exchange Commission.
Also, if the fund-raising effort were to consume more time than PTTEP envisages—particularly if the recapitalization procedure must be changed—there could be risk of a credit rating downgrade. Post-Cove acquisition net gearing will rise to 0.6-0.7x, which would be above its 0.5x policy threshold. Management claims that the rating agencies agreed to hold their ratings unchanged for as long as the recap plan remains underway.  
Action: While we expect fund-raising will go ahead eventually and PTTEP’s share price has fallen below its indicative price of Bt151, we still advise investors against rushing in now. The postponement of the EGM raises questions as to when and how the recapitalization will go ahead. As such, PTTEP will continue underperforming until the overhanging recapitalization plan and timeline is clear and perhaps Montara’s start-up has become more evident. Our HOLD rating stands.