PTTEP share price is down 14% YTD, though now 9% above the low in early June, pulled down by lower oil price (-12% YTD for Brent) and pessimism about the global economic outlook that could damage oil demand growth, despite a series of production cuts by OPEC+. Although we expect PTTEP’s 2Q23 net profit to remain solid, earnings will weaken YoY on lower oil and gas prices and a slight decline in sales volume. Our DCF-based TP of Bt185 is intact, pegged to LT Brent oil price of US$70/bbl. Maintain Neutral.
2Q23F profit flat QoQ despite lower oil price. We expect 2Q23F net profit (release Jul 31) to remain solid at Bt19.4bn (-6% YoY but flat QoQ) amidst lower oil and gas prices, shored up by non-recurring items (FX and oil price hedging gains). Recurring profit is expected to fall 19% YoY and 10% QoQ to Bt18bn on lower average selling price (ASP) and sales volume at 450kBOED, although both beat previous guidance.
Sales volume better than expected as the logistics issue at the Sabah-K project in Malaysia was resolved sooner than expected, allowing production to resume one month earlier. Sales volume still fell 2% QoQ due to lower volume contribution from Bongkot after the previous concession was switched completely to the production sharing contract (PSC) under the G2/61 contract. Note that PTTEP has kept production volume of G2/61 at 825mmcfd, above the daily contracted quantity (DCQ) of 700mmcfd, to offset lower production at G1/61 (Erawan). It says the better sales volume in 2Q23 gives upside to full-year sales volume target of 456kBOED.
ASP could to further QoQ on lower oil price. ASP in 2Q23 is expected to slip 15% YoY and 5% QoQ to US$47.5/BOE on lower oil price while gas price will remain stable due to the lag before price adjustment. The two-month lag for price adjustment at Oman Block 61 project also delayed the hit from weaker oil price on PTTEP’s average price for liquid products. Management expects average gas price for 2023F to remain in line with guidance of US$6/mmbtu, including the effect of greater sales volume from G1/61, which ramped up production to 400mmcfd by end-June 2023, with gas price lower than existing projects under the concession scheme. Management reaffirmed that unit cost in 2Q23 remains manageable despite an increase in depreciation expense back to normal after a one-time adjustment in 1Q23 to reflect lower decommissioning cost for Bongkot under the previous concession. We estimate a 3.6% QoQ rise in unit cost in 2Q23 to US$27.5/BOE, still in line with company guidance.
Upside to 2023F from better sales volume. We keep our 2023F unchanged with core profit dropping 32% YoY on lower oil price. At the same time, we see some upside to our projection on the higher sales volume guidance. Our current forecast is based on 2023 Brent oil price assumption of US$82/bbl vs. YTD average of US$80/bbl. Our DCF-based TP (end-2023) of Bt185/share is based on L/T Dubai of US$68/bbl and Brent of US$70/bbl from 2025F. Although the share is currently trading at only 9.7x PE (2023F) vs. 10-year average of 16.4x, investor appetite for the stock will be limited amidst rising global economic risks.
Risk factors: 1) Volatile crude oil price, 2) higher unit cost, 3) asset impairment and 4) regulatory change on GHG emissions.
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