PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP) 

We believe PTTEP will continue to see strong earnings growth momentum, driven by its solid ASP and volume. The Montara delay would cap share prices in the near-term, but we believe any share price weakness could present an attractive investment opportunity. PTTEP’s earnings in 4Q12 are expected to miss consensus numbers by 20% due to the Montara write-off, despite solid core earnings on high ASP and volume. Our FY12 EPS is cut by 5%. Still, the Montara delay should be the final overhang before share price outperformance expected in 2H13. We maintain Outperform and DCF-based target price of THB190 (WACC 11%) and see near-term catalysts from solid quarterly results. 
What Happened
We came away from our recent visit to the company with mixed results for PTTEP’s short-term outlook. On a positive front, the company is expected to again post another set of strong quarterly core earnings (THB15bn, flat qoq) on the back of improved ASP and volume. However, the company is likely to delay the start-up of its Montara oil field by 1-2 months, leading to a US$100m write-off in 4Q12. This is a negative surprise to us and the market and hence, we cut our 2012 earnings forecast by 5.1% to reflect this write-off.

What We Think
We expect earnings growth momentum to continue in 2013 given the volume growth from new projects of Montara (2Q13) and M9 (4Q13). We believe the three key concerns by investors – small reserve, rising cost, and diminishing returns – are overdone, and PTTEP has already
addressed and resolved the issues to attain sustainable growth.

What You Should Do
Buy on weakness post the newsflow from the confirmed Montara delay by Feb 13. We believe the overhang from the Montara delay will be the final drag on its share price. Once it is fully
started up, the valuation discount should narrow to reflect PTTEP’s strong earnings growth in 2013-14. PTTEP is currently trading at 9.2x CY13 P/E, a deep discount to its historical average of 12x. While PTTEP’s deteriorating ROE due to its expanding overseas portfolio is inevitable, resulting in valuation de-rating, we believe rising volume would support earnings growth.