PTT Exploration & Production

PTT Exploration and Production (PTTEP)

Lighting strike on GSP#5 has very small impact on PTTEP as a gas seller
According to our previous report, on the morning of 14 August 2013, there was
an accident incurring from the thunder storm and lightning strike on the Waste
Heat Recovery Unit or WHRU of gas separation plant unit 5 (GSP#5), resulting in
its cease of operation. From preliminarily assessment, the repairs will take
around 3-5 months, which would affect PTT and PTTGC. On the other hand,
PTTEP, which is a supplier of natural gas to the GSP#5, will get impacted very
slightly as a result of the take or pay agreement. However, PTTEP’s management
has revealed recently that the take or pay agreement might have an exception in
the force majeure case. Consequently, in the worst case that PTT reports that
the incident is force majeure, the daily contract quantity (DCQ) agreement PTT
has made with PTTEP (usually, PTT calculates annual cumulative DCQ of every
project in October) will become void, which means the take or pay penalty will
not be effective although PTT cannot purchase natural gas at the minimum
contract volume. On the contrary, if PTT cannot report the incident as force
majeure, PTT will still have to purchase natural gas at the contract volume,
which means PTT might have to distribute the gas to other gas separation plants
instead of GSP#5 and increase their production capacity. In this case, there will
not be any effect from the GSP#5 operation cease on PTTEP (currently, PTTEP
distributes gas to GSP#5 at 530 million cubic feet a day (through the pipeline 2
from Pailin and Bongkot North projects and pipeline 3 from Arthit North and
Bongkot South); 300 million of which goes directly to the power plant, while the
rest 230 million goes to the gas separation plant for production of LPG and
ethane.

Only 1-2% effect on 2013 EPS in worst case. Insignificant
In the worst case scenario, PTTEP might have to be responsible for the
disappearing gas volume (especially for those sent to the gas separation plant)
of 100 million cubic feet a day or 17,000 barrels a day. Under an assumption
that GSP#5 has to be shutdown for 5 months, PTTEP’s sales volume would drop
by 3% from the targeted sales of 300,000 barrels a day in FY2013, which would
affect the company’s full year profit by 1-2%, insignificantly. Moreover, the oil
price is now in an uptrend as a result of increasing demands following the world
economic recovery and a supply shortage from the problem in oil producing
countries in the Middle East and North Africa, which has made Dubai crude oil
price since the beginning of the year until present (YTD) stand at
US$104.37/barrel, higher than our assumption. This benefit is believed to help
offset the aforementioned negative factor.

Reiterate BUY. Negative factor would be offset by oil price uptrend
We still maintain our forecast and fair value unless there is a solid conclusion
from PTTEP management regarding the impact from the incident. We reiterate to
buy. 2013 fair value, DCF, is B188.70, implying 18% upside from the current
share price, while the company still has growth potential in the long run from
new investment projects.