PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP) 

Investment thesis

Although PTTEP’s stock was oversold following the oil price collapse, we advise standing aside and continue to prefer PTT within Thai O&G space. As the price war between OPEC and US shale oil producers will be nasty and of a relatively long duration, a V-shaped price recovery (as manifested after the 2008/09 crisis) is very unlikely. And a distant oil price recovery will further diminish expectations for PTTEP’s FY15 earnings. Moreover, more asset impairments will be booked, particularly on acquired assets (though the 4Q14 impairment should prove to be the biggest) if the current low price environment prevails.         

Diminished expectation for 4Q14 

We have slashed our FY14 NPAT estimate by 56% to Bt25,108m on anticipation of very weak 4Q14 numbers (due to be announced by Jan 29). We now expect a 4Q14 net loss of Bt20,798m, in line with the street’s projection. Heavy impairments on a devalued Montara project (due to low oil prices) and the Canadian tar sands project (due to 2-year slippage to the start-up plan to 2021) are the key factors—the firm earlier guided for a combined loss on the two assets of about US$1bn. 

PTTEP will also book unexpected write-offs of $100m (we had previously assumed $20m), an FX loss of $30m on depreciating BRL/US$ and CAD/US$, while a weaker baht boosted the effective tax (we assume 53%, up form 40% for 3Q14) and the firm will book a one-off adjustment to G&A expenses.       

Risk of further impairments an ongoing concern

Management guided that the forward oil price curve (as of YE14) was used to determine the Montara project’s value—by which we understand a price range of US$70-80/bbl. If that were to be the case, and assuming that current low crude prices prevail, we would expect a further impairment on the project. 

A bigger concern is a further impairment on the Mozambique project; we think the result may be known by year-end. The project has already opened an EPC tender. Once the EPC cost is finalized, PTTEP will reassess the value of the project. If the benchmark Asian LNG price were to fall sharply, an impairment would be likely. Moreover, another acquired project, the Natuna field in Indonesia (bought from Hess last year) might be subject to an impairment, in our view.               

Greater risk of downside to FY15 earnings forecast

Even overlooking the risk of further asset impairments, the variables in our FY15 projection are skewed toward significant downside. The oil price outlook is now weaker than it was a month ago (when we assumed a mean 2015 Brent price of US$70/bbl); it is now tilted toward MS’s bear-case scenario of $53/bbl. If that scenario were to play out, we would anticipate another 14% downside from our current profit forecast. 

Besides, the Algerian oil project’s start-up date may slip from its initial schedule of 2Q15—its output averages 20kbd (~6% of PTTEP’s FY15 petro sales target). Management said there was some sort of labor dispute at the construction site late last year and the firm is currently hiring on new workers. If the start-up were to be delayed, it would squeeze PTTEP’s petro sales target and our NPAT projection somewhat.