Thailand’s PTT Banking on a Shift to Coal
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Thailand’s leading state owned energy firm, PTT Pcl, is looking for investment opportunities in Africa, Australia, Indonesia, Myanmar and North America as it aims to expand its operations beyond its home territory. Just two weeks ago, the firm announced that it is planning to raise $958 million to finance the expansion as well as for working capital and debt refinancing.
The financing news comes just days after the company announced that it is purchasing the rest of the Singapore based Sakari Resources for $960 million. The deal will greatly enhance PTT’s coal assets as it is looking elsewhere to explore while Thailand’s domestic energy resource matures. Furthermore, Thailand’s energy demands have grown steadily this century. Even with the exceptional years of 2010 and 2011 where exogenous events have hampered growth, Thailand’s electricity production has risen at a CAGR of 4.74% while consumption has nearly kept pace at 4.34%. Consumption has averaged 93.2 +/-2.0% of production since 2000. Until last year, Thailand generated 67% of its electricity from natural gas and 20% from coal.
PTT already owns 45.3% of Sakari. The latter is the owner of two coal mines in Indonesia and a small trading company in Singapore. Due to the slump in coal prices, Sakari’s shares have fallen by 19% since the beginning of the year but following the news of takeover, the company’s shares soared by as much as 28%.
PTT is following an aggressive M&A strategy and is planning on spending $11 billion between 2012 and 2016. In doing so, it also wants to achieve the long term objective of raising its coal output six-fold to 70 million tons by the end of 2020 as they see coal as the fuel fuel for their future.
The prevailing sentiment was thatPTT paid close to fair value for Sakari and since PTT was looking to increase its coal assets represented a good value proposition. In 2011, the company also purchased the Indonesian coal assets of Straits Resources for $565 million.
But coal is not the end of the story. PTT is also expanding into the foreign LNG sector due to Thailand’s diminishing natural gas reserves. It has been fighting with Royal Dutch Shell (NYSE: RDS-A) for the acquisition of Cove Energy since the beginning of this year, which finally resolved itself in late July when Shell backed out. The $2.2 billion takeover was mainly due to Cove Energy’s 8.5% stake in one of the world’s most valuable gas discoveries in Rovuma Area 1 block near the coast of Mozambique. This deal not only gave PTT access to one of the richest gas reserves but also established the company as a leading player in the global oil and gas sector.
To finance this PTT will have to raise $3.1 billion from Thailand’s equity market which will be a substantial test for the Thai bourse as a sale of this size and scale has never happened before. On the other hand, PTT’s debt/equity ratio is 0.5 raising the money through loans, retained earnings or debentures is possible, but not preferred.
Like Indonesia, PTT is also looking for coal investment opportunities in Australia. Along with everyone else now that Western sanctions have been lifted they are eyeing their neighbor Myanmar’s substantial (10th largest in the world) natural gas as well as oil reserves.
By yearend their balance sheet will be healthier as PTT has reduced its annual investment budget by 16% to $2.47 billion due to lower than anticipated construction costs and reduced project delays. Declining construction costs were attributed to falling commodity prices in the 2nd quarter and the plunge in iron ore prices since July. The company has cash reserves of around $1.92 billion which gives them adequate room to maneuver.
The Market Vectors Coal ETF (NYSEMKT: KOL), which represents some of the leading coal and mining global firms has declined by 27% this year and prices will remain muted for the foreseeable future with a global recession likely in 2013 even with China pledging $156 billion in infrastructure spending.
The iShares MSCI Thailand Investable Market ETF (NYSEMKT: THD), which is weighted towards PTT by 9.6%, has improved by 21.6% in 2012, outperforming most of its Asian peers year to date as the Thai economy exhibits resilience after the floods from last fall. The SPDR S&P 500 (NYSEMKT: SPY) is up 14.2% year to date. THD is also paying a heftier, if more volatile dividend, 4.65% over the past year. PTT themselves, OTC ticker PUTRY, is trading at a current multiple of 11.1 and a forward multiple of 8.4 paying a 3.67% dividend. Cross-listing between Singapore, Malaysia and Thailand is due to occur by year end for those with access to those markets. We like the energy sector in the emerging ASEAN nations like Thailand and Indonesia especially with lower iron and coal prices bringing infrastructure costs down significantly in the past 12 months and believe that they will be under pressure for the foreseeable future due to a shift in China’s demand structure and current supply/demand fundamentals.
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