PTT Exploration & Production
Play
Sell into 1Q16 strength as 2Q dip looms SELL
PTT Exploration & Production Plc (PTTEP)
Investment thesis
Short-term speculation on the oil price ahead of OPEC + non-members
Doha meeting on 17 Apr and the forecast positive 1Q16 earnings surprise
may hold the stock price in the near term. As any meaningful uptick in oil
products is highly unlikely and forward earnings are tending to slide, the
current risk-reward proposition suggests reducing exposure rather than
holding for only a limited upside. As such, we downgraded our rating on
PTTEP to SELL from HOLD. Our tactical preference shifted to refiningcum-chem
plays on more earnings visibility with scopes for upside. SPRC
and PTTGC are now our two prime choices within the Thai O&G space.
Tax gain to prompt 1Q16 earnings surprise …
Despite the oil price downturn, PTTEP will likely post stronger NPAT for
1Q16 than the market currently envisaged—we estimated Bt4.9bn, up 4%
QoQ. Baht appreciation against the USD has deflated tax expenses and
also spurred for FX gains totaling Bt3.3bn. An extended decline in unit cost
from a 4Q15 low of US$35.2/bbl, could also emerge as a plus, on a
normalization of G&A expense and slowing E&P activities, the latter of
which is quite common for 1Q. Operationally, the weaker oil price and a
further slip in the gas price however outweighs the effect of lower unit cost;
ASP will slide to US$35/boe from 4Q15’s US$39/boe. That would slash the
core number to the tune of Bt1.5bn versus Bt1.8bn in the prior quarter.
… but 2Q16 skewed toward significant downside
Regardless of oil prices, 2Q16 will see greater scope for an earnings
downside. Assuming the current Brent price of US$40/bbl will prevail, we
anticipate NPAT at almost a break-even. Following the Apr adjustment
schedule, the firm’s gas price is expected to fall further to US$5.5/boe from
1Q16’s US$6.2/boe. This pullback will place weight on ASP by another
US$0.5/boe QoQ slippage to US$34.5/boe. Seasonal shutdown schedules
at its gas fields would squeeze petro sales and also nudge up unit cost. A
potential bounce in the USD remains another key wildcard—representing
significant downward pressure on NPAT (see Figures 1 and 2).
Petro sales likely to fall short—intensifying FY16 earnings risk
Scope for another cut in our FY16 estimate and the street’s projections is
now intensifying, in our view. Petro sales are highly likely to end beneath
our estimate and PTTEP’s guidance of 323k boe/d. Slower GDP should
squeeze the country’s gas demand and also the firm’s gas sales. As PTT
still has spare capacity for its first LNG receiving terminal facility, it is also
likely that cheap LNG imports will rise in the foreseeable future. If that does
turn out to be a case, it would arrive in the return of PTT’s lower gas offtake
from the indigenous gas fields, we calculate.
Gas price to trough in 4Q16—oil price holds the key
With a lagging adjustment in the indigenous gas price in response to the oil
price, PTTEP’s gas selling price will tend to decline throughout the course
of 2016. It will trough at US$5.1/boe in 4Q16 with the year’s average of
US$5.5/boe versus 2015’s US$7.2/boe. As PTTEP is gas-based, a falling
gas price will bode ill for its ASP outlook. If oil tracks sideways through
YE16 (not a bounce in 2H16, as we and the market anticipates), ASP will
then trough at US$32/boe, below its unit cost of US$34-35/boe. That would
prompt substantial cuts in our earnings estimate and that of the consensus.
