Expanding Production in Vietnam

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Thailand’s leading oil and gas firm, PTT Exploration and Production (PTTEP) is gearing up for a massive $3.1 billion equity sale to finance the $1.9 billion acquisition of Cove Energy for which the company had successfully outbid Royal Dutch Shell (NYSE: RDS-A). PTT’s equity sale will be the biggest ever in Thailand in which shares will be priced at 142 baht/share ($4.63/share) which is 7.2% lower than its Friday (Dec. 7) price of 153 baht.  The 650 million shares will be sold to its parent PTT Plc and existing shareholders. Moreover, PTT has set out on an ambitious four year $11 billion investment plan through which it seeks to increase its operations in Australia, Canada, Indonesia, Myanmar, Oman and Vietnam. PTT has significant representation in MSCI Thailand Index Fund ETF (NYSEMKT: THD).

PTT, which is 60% owned by the government, has a 65% stake in PTTEP. Its primary objective is to satisfy the increasing fuel demands of the Thai economy. The company also owns a 45.27% stake in Singapore’s coal company Sakari Resources and has made a $959 million offer to purchase the remaining shares.

Meanwhile, PTT is planning to build an enormous oil refinery in Nhon Hoi, Vietnam, which would rank among the five biggest in the Asia Pacific region, by investing $28.7 billion, which would make PTT the biggest foreign investor in Vietnam, by far. Dung Quat is the only refinery that currently operates in Vietnam with a capacity of 135,000 bpd which is expected to increase to 240,000 bpd in the next five years. PTT’s plan will produce a refinery that is five times as big as Dung Quat is currently with daily production approaching 660,000 barrels. The country’s own demand is around 400,000 bpd. With PTT’s plans, Vietnam could end up with surplus refined petroleum for the first time in its history.  Vietnam has moved from being a net exporter of oil to an importer as its production has fallen off its peak and has settled near 350,000 bpd. 

Without significant reinvestment and exploration, Vietnam’s production is scheduled to drop to around 150,000 barrels per day by 2020. 

PTT has not made any commitment yet as the massive scale of the project requires extensive groundwork and participation with the country’s central as well as provincial government. Vietnam has its own ambitious objective to increase its refined oil capacity to 25 million – 35 million tons by 2020 through construction of four other refineries and through PTT’s investment, the target could be achieved before the deadline. 

Vietnam is currently working on the Nghi Son refinery project, the country’s second refinery with a capacity of 200,000 bpd. The Kuwait Petroleum International Co and Japan’s third biggest refiner Idemitsu Kosan own 35.1% each of the Nghi Son refinery. Idemitsu Kosan is reportedly renegotiating its terms. Other partners include PetroVietnam with 25.1% stake and Japan’s Mitsui Chemicals with 4.7% stake. PetroVietnam and the country’s other listed companies are represented in Market Vectors Vietnam ETF (NYSEMKT: VNM)That PetroVietnam only has a 25% stake in Nghi Son is significant and suggests that given the current internal issues with a number of Vietnamese SOE (State-Owned-Enterprises) that better terms are on the table for foreign investors, especially after Conoco-Phillips (NYSE: COP) sold its assets to Perenco earlier in the year.

Foreign investment into Vietnam has dried up in the past 2 years due to very unfavorable market conditions and investors have been holding off waiting for better terms and more reforms before committing to the second big wave of investment capital to the country.

In its previous financial results, PTTEP has posted a 21% increase in revenues and a 26% increase in EBITDA to $5 billion and $3.5 billion, respectively, for the first three quarters of the current fiscal year.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>THD</strong></p> </td> <td> <p><strong>VNM</strong></p> </td> <td> <p><strong>S&P 500</strong></p> </td> </tr> <tr> <td> <p><strong>YTD</strong></p> </td> <td> <p><strong>30.90%</strong></p> </td> <td> <p><strong>12.71%</strong></p> </td> <td> <p><strong>13.50%</strong></p> </td> </tr> <tr> <td> <p><strong>Beta</strong></p> </td> <td> <p>1.25</p> </td> <td> <p>0.71</p> </td> <td> <p>1</p> </td> </tr> <tr> <td> <p><strong>Prem to NAV</strong></p> </td> <td> <p>1.6%</p> </td> <td> <p>3.4%</p> </td> <td> <p>0.1%</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>12</p> </td> <td> <p>10</p> </td> <td> <p>14</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>2.43</p> </td> <td> <p>1.04</p> </td> <td> <p>2.01</p> </td> </tr> </tbody> </table>

Year to date, through the week ending December 7, THD and VNM have risen 30.9%, 12.71% respectively.  THD has been one of the stars of 2012 among ASEAN nations with the SET Index rising 30.5% year to date.  The VN Index rallied strongly in the 1st quarter, but the economy hit the wall as the State Bank’s ultra-tight monetary policy finally began forcing liquidation of bad investments, while the Bank of Thailand held fast even after 2011’s devastating floods and the economy has recovered well.  PTT and its subsidiaries are moving aggressively to support the continued growth of the Thai economy with moves around the region, including Myanmar.  These moves makes PTTEP – which trades on the Bangkok exchange and has an ADR that trades in the OTC market under the symbol PEXNY – an attractive long-term energy play in SE Asia as they attempt to triple their production.  The Cove acquisition was dilutive to the share price, but the company now has access to the massive gas reserves off the coast of East Africa.



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