PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)

 

Investment thesis

Despite growing concern on impairment losses, PTTEP’s current valuation of 0.7x P/BV seems to price those in somewhat. But, we prefer to stand aside, as the size remains widely varied and very subjective (action on which may be undertaken in 3Q15). Post-impairment earnings are set to improve and non-recurring expenses would have been less impactful—but we are as yet unconvinced that re-entry is prudent right now. The sub-par earnings outlook and mid-teen P/E multiple (albeit on attractive DCF value) wouldn’t attract investor appetite in the stock at this time. We continue to prefer PTT over PTTEP within our Thai upstream context.    

Loss on Baht depreciation dents 3Q15 profitability … 

The bottom line for 3Q15 (due to be announced on 22 Oct) should be worse than we had expected due largely to extra losses on FX and also inflated tax expenses from the depreciating THB/USD—in all, around US$240m. This exceptional loss will outweigh the gains made on hedging obligations of US$100m. As such, we trim sharply our 3Q15 projection to Bt113m (from Bt4bn earlier) versus the Bt1.3bn posted for 2Q15. Operationally, the number should also have softened QoQ on falling ASP (-6% QoQ) and huge exploration write-offs (US$70m versus 2Q15’s US$28m). However, Myanmar fields’ resumption of operations will boost its petro sales 2% QoQ (see Figures 1 and 2).      

… 4Q15 set to bounce strongly

The 3Q15 setback will be the trough for the year and earnings will improve in 4Q15 due to: 1) non-recurring expenses, i.e. inflated tax expenses from Baht depreciation would have had much less of an impact than in 2Q-3Q15. With its high mark at end-Sep THB/USD, the more stable Baht (if it prevails toward YE) may curb the firm’s tax expenses. There will also be marginal gains/losses on oil hedging, as it marked the forward Brent price at US$49/bbl as of end-3Q15, 2) benefit from the Baht weakness will fall into fourth-quarter P&L. While its Oct gas prices are forecast to be revised down to US$6.5/mmbtu from US$7.2/mmbtu, the effect on prices in Baht terms would be neutral, considering a 10% weakness from the Apr price adjustment, and 3) exploration write-offs could be fewer, as the major dry wells were expensed in 3Q15.    

Forecasts scaled back—impairment significant scope for downside

Fine-tuning with accumulated extra losses and Baht-weakness-boosted tax expenses in 9M15, we cut our FY15 NPAT estimate 29% to Bt12,188m, which is currently 40% below the consensus estimate. Our revision was conservatively based on Brent oil of US$48/bbl. Yet, we have yet to incorporate potential impairment losses—the scale remains widely varied. 

PTTEP is likely to impair the value of all of its operating and developing assets in 3Q15. In our view, the write-down in operating assets, Montara in particular, could be less than it was in 4Q14’s US$400m, as it marked down its Brent forward assumption to US$70/bbl at end-2014 from earlier US$100/bbl. But, the impairment against underdeveloped Mozambique is a matter of concern. While the LNG price falls short of its prior assumption, expansive proven reserves (from 15tcf used as its base assumption for the purchasing price to 65tcf currently) and the possibility of development cost savings, would buffer against deteriorating value of the project. As such, we hold our view that US$1bn in losses would be the worst-case scenario.