PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

Investment thesis
Our meeting with management yesterday leads us to believe that the firm’s growth strategy has shifted toward organic assets rather than inorganic means. We view the strategy shift positively, as its eases concerns about the risk of a further cash call and the extra burden associated with new acquisitions. While the scope for share-price upside in short-term is capped by the impending recapitalization, we are strongly confident that PTTEP offers the best bet within Thai Energy space over a one-year investment horizon on volume expansion and a more stable oil price outlook. The stock also trades at a fully-diluted YE13 PBV of 1.8x, down 1.3SD from its long-term mean and close to its nadir of 1.5SD. 

Focus shifted to 600KBD organic growth target …
While the long-doubted 900KBD petroleum sales target remains its aspiration, PTTEP has shifted focus to 2020 target of 600KBD derived organically. This guidance leads us to believe that M&As are no longer the central plan, so concerns of further recapitalization risk and the firm’s execution ability for new assets should ease. Management also said that any future acquisition (if any) would be operating or near-producing of a size of no more than US$1bn.     

…but earnings risk may rise somewhat
The firm’s organic growth target looks more-or-less achievable. Based on our preliminary assessment, we conservatively estimate that the start-up of new projects—Montara (1Q13), M9 (1Q14), Algeria (2H14), KKD (+60KBD by 2017), M3&M11 (2017-18) and Cove (2019)—will bring about 500KBD in petroleum sales by 2020. On the flipside, earnings risk may arise from exploration write-offs, given that the firm has a heavier drilling program ahead—50 wells from 4Q12 through YE13.   

Montara start-up—further delay unlikely
Management is now less confident that the project will start-up by Feb 2013 (as earlier guided), citing only a 50% chance, as the Australian cyclone season is approaching. But, the odds rise to 80-90% for March; we still assumed by 2Q13. Apart from the weather, we don’t see any obvious potential causes of a further delay. The project is now undergoing final integrated commissioning processes. 

Bottom-line dip—but solid core number to prevail in 4Q12
Although we anticipate a 4Q12 profit decline, given that 3Q12 extra gains of Bt1.6bn are unlikely to recur, we have renewed optimism about PTTEP’s core earnings outlook. Despite the planned shutdowns at Bongkot, Yadana and Yetagun, we now expect only a 2% QoQ decline in output. Meanwhile, 3-4% QoQ increases in gas prices at the Oct adjustment schedule will boost 4Q12 ASP slightly.