PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

Investment thesis: While the scope for near-term upside is capped by the impending recapitalization, we have renewed optimism that amid an unfavorable industry outlook, PTTEP offers the best bet within Thai Energy space over a one-year investment horizon. The risk-reward trade-off from the current level has improved. Under the combination RO & PP scheme, concerns about price depreciation through the book-building process are unlikely. The stock trades at a historically low valuation—a fully-diluted YE13 PBV of 1.7x, down 1.5SD.
As the Montara project will start up next year following three years of delays since the incident in late 2009, we think it makes sense to roll over our investment horizon to YE13 from YE12. Assuming a PO price of Bt150/share, we have derived a target price of Bt188 (up from Bt172) and have upgraded our rating to BUY from HOLD.
Montara delays are now behind us: PTTEP announced two months of slippage to the project’s start-up to Feb 2013; we had assumed 2Q13. Despite that, we don’t see any reason remain bearish on Montara—it is now in the final stages of its integrated commissioning process. Rather, the delay means that Montara’s production profile shifts into 2014. We have trimmed our PTTEP FY13 petro sales projection by 2.6% to 322KBD, but increased our FY14 assumption by 2.5% to 356KBD.
Higher liquid production—better leverage to oil prices: The firm’s production dynamics are shifting toward more liquids next year—we expect the liquid-to-gas ratio to rise to 38:62 from 33:67 in 2012. Apart from Montara’s start-up, average production at the Vietnam 16-1 and S-1 projects will ramp up to full capacity. With MS’s constructive oil price outlook, greater liquid production would be a boon for PTTEP’s realized petroleum price, so the discount to the oil price will diminish.
Record earnings expected in 3Q12, followed by a dip in 4Q12: We expect PTTEP to post record earnings for 3Q12 of Bt19.2bn, up by 149% QoQ and 158% YoY. The earnings drivers were broad-based, both operational improvements and extra gains—particularly an FX gain, insurance claims and a lower effective tax rate. But forecast record earnings in 3Q12 will be followed by a dip in 4Q12—we model for only Bt12bn. While gas prices will be revised up in October, anticipation of softer oil prices will weigh on the firm’s price realization. Planned shutdowns at the Bongkot, Yadana and Yetagun fileds will also squeeze 4Q12 output.

Outlook
Share price deserves a re-rating; target price lifted to Bt188: Although a pending recapitalization might limit its share price performance in the near-term (possibly until the book-building process is completed in late Nov), we are strongly confident that PTTEP has further to run, given next year’s promising profit growth outlook (up 17% YoY) and because earnings upside is on the agenda. Mounting concerns about post recapitalization ROE dilution have already been priced in—the stock currently trades at historically low valuation multiplies and also at an undemanding valuation compared with most regional O&G counters (see Figure 1).
As the Montara project will ultimately commence next year (we assume 2Q13) after three years of delays since the incident in late 2009, we think it makes sense to roll over our DCF-derived target price to YE13 from YE12. Assuming a PO price of Bt150/share, we have derived a DCF-based target price of Bt188, which implies a one-year forward PBV of 2x, 1SD below its long-term average. In our view, a discount to the long-term multiple would factor in anticipation of the firm’s forward ROE returning to an industry norm from an above-normal trend for the past 10 years.

Montara delays are now behind us: PTTEP recently announced two months of slippage to Montara’s start-up to February 2013 (we had already conservatively assumed start-up in 2Q13). Despite that, we don’t see any reason to remain bearish on its development—the project is now in the final stages of its integrated commissioning process. Rather, the delay means that Montara’s production profile shifts into 2014—PTTEP cited production targets of 25KBD for FY13 and FY14. In sync with the firm’s guidance, we have trimmed our PTTEP FY13 petroleum sales projection by 2.6% to 322KBD, but increased our FY14 assumption by 2.5% to 356KBD. With MS’s recently introduced mean Brent price forecast of $115/bbl for 2013 (up from $110/bbl for 2012), our PTTEP gas price assumptions for FY13-14 will rise to $7.4/mmbtu and $6.9/mmbtu from $6.8/mmbtu and $6.3/mmbtu, respectively. As such, our FY13 profit projection dips 3.3% to Bt66,748m. But we have raised our FY14 profit forecast by 13.1% to Bt65,445m.

Higher liquid production—better leverage to oil prices: The firm’s production dynamics will shift toward more liquids next year—we expect the liquid-to-gas ratio to rise to 38:62 from 33:67 in 2012. Apart from the Montara start-up, average production at Vietnam 16-1 project will ramp up to full capacity of 45KBD (versus 35KBD this year) and the S-1 project will produce at a rate of 30KBD, up from 28KBD in FY12. While macro uncertainty abounds, MS is positive about the oil price outlook, citing that greater supply risk is likely to outweigh demand disappointment (see MS’s Sept 6 Crude Oil report—“Plenty of uncertainty, but risks skewed bullish for ’13”). With that in mind, greater liquid production would be a boon for PTTEP’s realized petroleum price, so the discount to the oil price should diminish, in our view. Pegged to MS’s 2013 Brent price projection of $115/bbl, we anticipate that ASP will rise to $69/boe from $62/boe for 2012. 

Record earnings expected in 3Q12, but … We anticipate that PTTEP will post record earnings in 3Q12 of Bt19.2bn, up by 149% QoQ and 158% YoY. The key earnings drivers of the estimated profit surge were broad-based, both from operational improvements and extra gains—particularly an FX gain, insurance claims against the Montara incident and a lower effective tax rate. A stronger QoQ baht against the US dollar means lower income tax. This also coincides with the Australian government’s “Tax Augmentation” regime for every July—we, therefore, anticipate that PTTEP’s effective tax rate will decline to 39% from 55% in 2Q12. Operationally, petro sales are estimated to have increased 10% QoQ to 298KBD on Bongkot South’s full capacity run and Vietnam 16-1’s production increase, which should outweigh the effect of a slightly lower ASP.

..seasonality and no extra gains will mean a contraction in 4Q12: Given that extra gains are unlikely to recur, the forecast record 3Q12 earnings will be followed by a dip in 4Q12—we model for only Bt12bn. While gas prices will be revised up further at the scheduled October adjustment, anticipation of softer oil prices is likely to weigh on PTTEP’s price realization. Additionally, planned shutdowns at the Bongkot, Yadana and Yetagun fields will squeeze output during the quarter.

Recommendation and valuation
Upgraded to BUY from HOLD with revised TP of Bt188: While the scope for near-term upside is probably capped by the firm’s recapitalization process, we are strongly confident that amid an unfavorable industry outlook, PTTEP offers the best bet on a one-year investment horizon within Thai Energy space. The risk-reward trade-off has improved—price depreciation through the book-building process is unlikely, we believe. Under combined RO and PP scheme, we don’t think existing shareholders will have to accept a big discount on any unsubscribed shares that might go to private placements to new shareholders.
The stock currently trades at a historically low valuation, a fully-diluted YE13 PBV of 1.7x, 1.5SD below its long-term average. Furthermore, Montara’s start-up will boost the profit growth profile. In order to take into account PTTEP’s promising FY13 growth outlook, we have rolled over our DCF-derived target price to YE13 from YE12 and upgraded our rating to BUY from HOLD with a revised target price of Bt188, up from Bt172 previously.