PTT
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Some changes on the way, but nothing to fear BUY
PTT Plc
We arranged an exclusive lunch meeting with top PTT management led by Dr Pailin
Chuchottaworn, President and Chief Executive Officer, and four other executives. The
presented PTT’s business strategy and their assessment of the impact of energy
reform, including the spin-off of the gas pipeline. In their view, the impact will be
marginal and will in fact open the way to compete in gas-fired power generation. PTT
aims at becoming an ASEAN energy company by expanding into other ASEAN
members over the next decade while maintaining Thailand’s energy security. We
continue positive with a BUY rating with TP of Bt400.
Highlights:
Other than the freeze on an increase in LPG price, management noted no real
operational change since the National Council for Peace and Order (NCPO) took
control in May. Energy reform is proceeding and management believes the NCPO is
on top of the situation after gathering information from operators and related
parties. This implies reform is unlikely to hurt PTT, especially in terms of prices.
PTT prepared to spin off the gas pipeline business since privatization in 2001 and all
accounts are already separated. After the National Energy Policy Committee
(NEPC) gave the nod to proceed with the spin-off and waived the earlier sticking
point – the tax on asset transfer - PTT is proceeding with the setup of the gas
transmission business up as a new company, still 100% owned by PTT.
Management said the preliminary book value of this business is ~Bt150bn, 8.3% of
PTT’s total assets as of 30 June 2014, but the transfer price will be based on fair
value. The key objective of the spin-off is to create an opening for third party
access (TPA), which is now undergoing a public hearing. PTT will take ~6 months to
formulate the TPA code that will govern the use by third parties, including the
quality of gas transmitted in the pipeline. PTT will remain as the pipeline operator.
TPA increases the flexibility of gas sourcing by users, mainly power plants, given
the rise of LNG availability in the market, instead of only piped gas supplied by PTT.
Management commented, however, that if power producers have a problem in
sourcing their gas, it could increase the instability of gas supply within the system.
At the same time, this opens the door for PTT to engage in the gas-fired power
generation business: since anyone can use the pipeline, PTT will no longer be
exposed to accusations it is monopolizing the gas for its own IPPs.
Management says it is still placing top priority on the divestment of non-core
business, especially oil refineries (BCP, SPRC), with an eye to raising competition in
the market, although these businesses are already operating with a free market
mechanism. SPRC will be divested via an IPO, made possible by the NEPC’s
amendment of its Construction and Operation Agreement. For BCP, the timeframe
is flexible; it has several options to divest its holding in BCP, such as selling the
shares in the stock market or to strategic investors. PTT is also studying spinning
off its retail oil business to unlock the hidden value of the business.
With the amount of natural gas available in the Gulf of Thailand declining, PTT will
focus more on the LNG chain to obtain energy security for the country. There is no
worry about gas for fuel, but feedstock for the petrochemical industry may need
to be sourced from other countries. Other options include setting up plants in
resource-rich countries or to move away from gas-based to liquid-based
production. PTT is working on huge integrated oil and petrochemical projects in
Indonesia and Vietnam that are expected to be finalized soon. This goes well with
its strategy to become an ASEAN energy company in the next decade.
