Q2 2017 PTT Exploration and Production PCL Earnings Call

PTTEP.BK - PTT Exploration and Production PCL
Q2 2017 PTT Exploration and Production PCL Earnings Call
Jul 27, 2017 / 10:00AM GMT 

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Corporate Participants
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   *  Chanamas Sasnanand
      PTT Exploration and Production Public Company Limited - VP of Capital and IR

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Conference Call Participants
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   *  Ajay Mirchandani
      JP Morgan Chase & Co, Research Division - Senior Analyst
   *  Mayank Maheshwari
      Morgan Stanley, Research Division - Research Analyst

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Presentation
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 Unidentified Company Representative,    [1]
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 Okay. So basically, welcome to the Q2 results discussion from PTTEP and also in this call, I think we have already distributed 2 sets of presentation. One is the conference call on the Q2 results as well as another one is in the investment in the MLNG Train 9. So I'll go through both of the package. Maybe I'll start with the results first, and then you ask and then we go for the Q&A on the results, and then we move into the investment in the MLNG Train 9.

 Okay. So let's start with the quarterly results. If you flip to Page 1, which is the summary of our Q2 performance, you'll see that basically the -- that we still generated the positive core earnings for the period. However, if you look at the -- by the item, you'll see that total revenue basically [dipped] about 5% Q-o-Q. Main contribution, I would say, basically came from the softened sales volume.

 So if you look at our sales volume, basically, you'll see 7% reduction Q-o-Q. However, sales price, average sales price still maintained at around like $38 per BOE, which is about the same level as the previous quarter. For the sales volume, Q2 stood at around 281k BOE per day. That represents about 7% reduction Q-o-Q. Majority of that reduction, I would say, came from the planned shutdown activity in Bongkot. So basically, that took out about 13k BOE per day.

 Also, we have lower sales volume in Montara because -- due to the cyclone disruption. So we support -- we were supposed to have 2 loads. However, it's now to be only 1 load, so that's why there was about 6k BOE per day reduction in Montara's sales volume for the quarter as well.

 And also, as you're probably aware, we have the temporary suspension in the S1 operations of about 23 days, so that basically also took out another 4k BOE per day of the sales volume as well. So that's a little bit of the reconciliation Q-o-Q. However, if you remember during the previous quarter, we also gave the guidance for the Q2 sales volume. Last time, we told you that we think it would be around 300k BOE per day; however, it turned out to be 281k BOE per day. So that was about 19k BOE per day lower than expectation. So I would say that, out of those lower than expectation volume, majority came from the S1 suspension, as already mentioned, and also the impact on the low nomination in the Gulf of Thailand, especially in Bongkot and Contract 4 Projects, which are lower than our expectation.

 Moving on to the expense. You'll see that, basically, total expense increased about 9% Q-o-Q, mainly came from the increase in the OpEx due to maintenance activity, mostly in Bongkot. We had shutdown planned in Bongkot about 22 days for the quarter. And if you look at the exploration expense, you'll see that exploration expense this quarter was about $19 million, quite significant increase compared to the previous quarter. This is due to we have more on-seismic activities, mostly in Zawtika and also MOGE-3 Project, and the seismic cost was about $15 million. The rest, $4 million came from the write-off. We have to drive those in this quarter in (inaudible), also the G4/43 Project in the offshore Thailand.

 Moving on to DD&A. You'll see the 9% reduction Q-o-Q. Basically, I would say that the reduction from the depreciation expense mainly because we had the lower sales volume in MTJDA and also Montara Project. And as you're probably aware, these 2 projects have quite a large DD&A base. So with the reduction of the sales volume of the high DD&A project, so that basically brought down the overall DD&A for the company.

 Income tax expense. This second quarter, you'll see $67 million increase Q-o-Q compared to the last quarter that we had, actually the tax serving of $8 million. This is -- basically, came from the small appreciation in Thai baht. Q1 Thai baht appreciated about THB 1.35 per USD. However, in Q2, it also did appreciate, however at a smaller scale of around THB 0.47 per USD.

 Next item is the gain or loss on FX. We actually have gain on FX of THB 11 million for the second quarter this year. This is due to the appreciation of Thai baht as well. So all in all, the bottom line net profit of Q2 stood at around $220 million, a reduction compared to $349 million in Q1. Recurring net profit was about $167 million and nonrecurring was about $53 million.

 Of this $53 million nonrecurring, the component -- I'll break down into the component for you. Basically, we have gain on FX of around $56 million, and of this gain on FX of $56 million, basically, it comprised the appreciation of Thai baht that have the impact on the tax serving in terms of the deferred set (inaudible) and also, down the road, revaluation. And also, we have the actual gain on FX as well at around $11 million. We also have the loss on FI, which is the financial instrument of around $3 million, and that comprised the gain on oil price hedging of $5 million, offset with the loss on forward contract of $8 million.

 Okay. And if you flip to the next page, we basically will go into details in terms of the sales volume and average sales price. So basically, in terms of the sales volume, Q2 sales volume was about 281k BOE per day, and I already mentioned in terms of the reduction of 70% Q-o-Q. Also, we have provided the guidance for the sales volume of the next quarter of Q3. We think it will be approximately 290k BOE per day. And also the total -- the whole year 2017, sales volume would be approximately 300k BOE per day.

 Gas price. In Q2, gas price was about $5.66 per MMBtu and basically, this represented about 8% increase Q-o-Q. Reason being that we had the renewable -- the renewal of the price for Bongkot and Myanmar in the second quarter this year. I think we also provided the guidance that we see Q3 gas price would be around $5.6 per MMBtu, and the whole year for 2017 would be around $5.5 per MMBtu. Liquid price Q2 was about $48 per BOE, so that was about 9% reduction Q-o-Q. And this is in line with the 6% reduction in the average Dubai price Q-o-Q, as well.

 That's why if you look at the average sales price for the quarter, it was about $38 per BOE, and that is quite in line with the last quarter. That's a little bit of improvement. Volume mix, still 71% gas and another 29% liquid. For...

 Okay. If you look -- if you move to the next page on the unit cost, basically, you'll see that unit cost for the second quarter was about $29 per BOE and it was about 6% increase Q-o-Q. And this was mainly because of, as I already mentioned, we have maintenance activity, quite a number of activities, especially in Bongkot. So that basically brought up the OpEx and also the maintenance costs.

 If you look at the DD&A, basically, you'll see that DD&A was lower in Q2 2017. You will see DD&A at around $14.9 per BOE. And the reason being that, I think I already mentioned, that we have lower sales volume in MTJDA and Montara. We've had quite a high depreciation there.

 Finance cost. A little bit increased Q-o-Q, and this is -- because this is finance cost per unit, so basically, when we have lower unit cost -- lower unit of production, so that's why you see the higher finance cost per unit.

 Royalty. Royalty increased a little bit, and this is in line with the sales price.

 G&A. G&A, it was quite a significant increase, about 31% Q-o-Q, and this is -- the reason being that, in Q1, we had sourced out adjustment and that's why G&A in Q1 was lower than normal. So I will say that G&A for the second quarter is kind of back to normal level.

 Exploration expense increased quite significantly, and reason, I think I already mentioned that we had seismic costs and also the write-off of 2 wells. OpEx also increased and this is in line with the maintenance activity that we have during the second quarter. And that's why you also see the lifting cost increase to about $4.3 per BOE in the second quarter as well.

 Drilling success ratio, 0:2 in Q2 2017. We have also provided the guidance on the unit cost, and we think it would be around -- Q3, would be around $30 per BOE and also the total year, FY, of this year 2017 would be about $29 per BOE.

 Okay. If you'll move on to the next slide on the income segment, basically, I think we -- in the second quarter, we still maintained quite a healthy EBITDA margin. If you look at the EBITDA margin for the year -- for the quarter, was about 69%. And the whole year this year, we still maintain the guidance that we would achieve the EBITDA margin of around 70% level. And the other item, I think, in terms of the ratio and financial ratio, remained pretty much the same compared to the previous quarter.

 Okay. If you look -- if you move on to the next slide, on #6, in terms of the balance sheet, still very solid balance sheet and the gearing still remain very low.

 Total asset. If you look at Q2 compared to Q4 last year, it basically, I will say, about the same level. We still maintain the total asset at around $18.8 billion. And if you look at the cash and cash equivalents, right now, as of Q2 this year, our cash on hand was about $4.2 billion.

 Total liability decreased a little bit compared to the -- to last year, and this is due to the lower tax payable and also the lower accrued expense. Equity increased from last year, basically, due to the accumulation of our net income. And D/E ratio, as I already mentioned, still remain very low at 0.25; and average loan life still the same at 7.7 years; and then average cost of debt, about 4.46%.

 Next slide on the cash flow. So I think we still, during the 6 months of this year, the first half of this year, we still managed to generate quite a robust cash flow generation. You can see that we have basically generated operating cash flow of around $1.1 billion. And we have CapEx for the first half of around $500 million. And most of the CapEx spending, 70% is in Thailand and 23% in Southeast Asia. And more -- and I would say that the key projects that we've spent the CapEx on includes contract for Arthit, Zawtika, S1 and Bongkot.

 Also, we have generated the free cash flow of around $549 million when we net out with the finance cost to be paid on the interest spend and also the dividend payment. We have the cash in of $184 million. And if you combine that with the cash on hand at the beginning of the year, $4 billion, that's why we ended -- we had cash on hand of $4.2 billion for the second quarter.

 Next slide on the dividends. We have just declared a dividend of THB 1.50. The interim dividend for this year was THB 1.50 per share and that basically represents about 31% of the payout ratio and the [ex-d] date would be on the 8th of August, and then the dividend payment date would be on 25th of August this year.

 Okay. Last slide, I think we would repeat again in terms of the guidance that we have provided in terms of the sales volume, Q3 would be about 290k BOE per day; whole year would be around 300k BOE per day. Gas price: Q3 would be $5.6; whole year would be $5.5. Unit cost: Q3 would be around $30 per BOE, and the whole year would be around $29 per BOE. And also maintain EBITDA margin at 70% level.

 Okay. So basically, that kind of wraps up our financial results. If you have any questions, please?

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Questions and Answers
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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [1]
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 [Panita], Ajay, here, at JPMorgan. Just a couple of quick clarifications. Given the fact that you're guiding 300,000 for the full year on sales, and you are already saying it's only going to be 290,000 in Q3 as well, on -- just on a simplistic back of the envelope, that kind of suggests 4Q would be 320,000. Is that realistic target? And similarly on gas price, it kind of feels that given Q3's $5.6 and first half is also $5.55, any reason you're still guiding for full year number at only $5.5? I would have thought it would be slightly higher, maybe $5.6 or something.

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 Unidentified Company Representative,    [2]
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 Okay. All right, Ajay, maybe on the sales volume first. You are correct. We think Q4, it will be quite -- we expect quite improvement in terms of the sales volume. This is due to the fact that, normally if you look at the track record in the past, Q4, we have lower activities in terms of the maintenance shutdowns, in terms of the shutdown. So that's why, normally, Q4 we'll have the highest sales volume. So -- and we also expect the same thing would -- the same pattern would happen this year. However, there's still uncertainty in terms of the low nomination in the Gulf of Thailand gas as well, and that risk remains.

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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [3]
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 Okay. And on gas prices?

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 Unidentified Company Representative,    [4]
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 On gas price, basically in Q4, there will be the revision of the gas price, mostly in all of the projects, yes, in Gulf of Thailand, in Bongkot, and also in Myanmar. And if you look at the gas price -- if you look at the oil price, that -- in -- during the past 6 months, it kind of went down.

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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [5]
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 So are you saying starting October, whenever the next reset happens, you don't expect a material change? If anything, it will be flattish to maybe a slight reduction? Is that how we should read it, because as you pointed out, it will be the last 6 months oil prices have moved down? Because my impression previously was, because it's going to be the last 12 months, effectively, you will still get a slight uptick. Just wanted to get a sense on that.

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 Chanamas Sasnanand,  PTT Exploration and Production Public Company Limited - VP of Capital and IR   [6]
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 I'll also say -- Ajay, this is Chanamas, here. One thing that (inaudible) [Khun Panita] mentioned about the 6 months as well, but I think the majority will come through the (inaudible) for the revision of the gas price in Contract 4, which is Pailin. That check about -- yes, so that highlights the annual adjustment. So there's going to be a little bit impact on the gas price in the fourth quarter.

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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [7]
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 But that's the question I just want to clarify, because it's only done once a year, I would have thought Contract 4 pricing would go up. Because, again, last year was third quarter '16 and now, if you just look at it, prices have obviously, versus '15 and '16, has actually slightly moved up. So I thought 4Q onwards, gas prices from Contract 4, as you pointed out, would move up and therefore blended price would also move up.

 (technical difficulty)

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 Unidentified Company Representative,    [8]
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 I think somebody is putting the line on hold. We don't hear you anymore, so.

 (technical difficulty)

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 Unidentified Company Representative,    [9]
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 Okay, back to normal now. Okay, Ajay, basically, in Contract 4, I will say that when you -- when we told you that the lag time of the gas price on average of 6 to 12 months. So that is average. However, in each particular project, the lag time is different, okay? And we cannot tell you by project in detail in terms of the lag time. However, from our assessment we have, we see the reduction in Contract 4 and also we see the reduction in Q4 gas price.

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 Mayank Maheshwari,  Morgan Stanley, Research Division - Research Analyst   [10]
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 [Khun Panita], this is Mayank.

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 Unidentified Company Representative,    [11]
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 Yes, Mayank.

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 Mayank Maheshwari,  Morgan Stanley, Research Division - Research Analyst   [12]
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 Just wanted to check, in terms of your CapEx, you are running way below that your full year guidance. Any plans to revise that guidance down?

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 Chanamas Sasnanand,  PTT Exploration and Production Public Company Limited - VP of Capital and IR   [13]
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 Mayank, this is Chanamas, here. Actually, we are discussing about that at the moment as well. But eventually, we have seen some activities we'll be taking up in the second half of the CapEx. We would expect that majority will come from the Myanmar project like the Zawtika. We plan to have some wellhead platform to be installed. And yes, I mean, like in the first half, there was some -- a little bit delay on the wellhead platform installation. So it's going to happen, a couple of wellhead will be installed in the second half. And will be like of our contract for Bongkot and S1, that will be some activities coming in the second half. So I think we are monitoring at the moment. But however, I would like to -- we would like you to use like -- normally we're going to utilize budget about 80% to 85% of the total budget. So probably, that's going to be fair number that you're going to use on your model from now on.

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 Mayank Maheshwari,  Morgan Stanley, Research Division - Research Analyst   [14]
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 Okay. Just a little question on that trend was that you kind of talked about this dividend of -- interim dividend of 30%, which is your policy. But like last year, do you think there is something that you didn't look at on the dividend front to go back to normal levels, like in 2014 or 2013, considering you have been buying back bonds, as well as now actually your cash flow looks much better than doing the effect of summing off?

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 Chanamas Sasnanand,  PTT Exploration and Production Public Company Limited - VP of Capital and IR   [15]
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 For the full year, I think we have to see how the progress on the M&A and the future investment plan as well. We are looking at the budget for 2018 as well. So this is highly factoring, we have to monitor those items before to make decision whether we would be able to pay the dividend at the same level.

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 Unidentified Company Representative,    [16]
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 Are there any questions? Okay, looks like no more questions.

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Presentation
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 Unidentified Company Representative,    [1]
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 So maybe we can just move to the -- another package on the investment in the MLNG Train 9. Okay. So basically, if you look at the first slide that we have provided, you'll see that basically, we, at PTTEP, we have set up a company called PTTLNG. And this day, we completed -- we own 50% in facility, own 50%; recently, acquired 10% in the MLNG Train 9 from Petronas. And this project basically is running -- is up and running already. It's COD since January this year, so it's kind of, we think, kind of (inaudible) already. So -- and also, I think you probably have seen our said notification that the per share price for 10%, which is approximately $500 million for the 10%. And that basically comprise both equity and debt. Okay.

 For the project itself, the MLNG Train 9, the location is in the onshore Sarawak in Malaysia. This is the liquefaction plant only. It doesn't come with the upstream. It's only liquefaction plant. As I already mentioned, up and running, operating total capacity is about 3.6 million tons per annum. The contract life, about 20 years. And right now, Petronas is the operator, they own 80%, we own 10%, and JX Nippon own another 10%.

 In terms of the investment rationale, I think, basically, we think it is quite a strategic investment for us, because if you remember, we have always communicated to the market that we see quite an increasing of LNG demand in the country, and we in PTT would like to capture this growth in LNG by joining hand and then invest together in the LNG value chain project. So this is -- basically ticks the box in terms of that objective.

 And also this project is low risk. It's already COD and highly secured in terms of the marketing as well, because there is in place LNG SPA agreement in terms of the long-term LNG agreement already. And Petronas is a world-class LNG operator, so we think we're in good hands in that sense. And also with the precaution in the production stage, it also comes with a revenue and a cash flow, okay?

 And then we also see that this is quite a very solid platform to get involved in the LNG market in Malaysia, which is one of the largest in Asia. And also, this is -- this will provide the opportunity for other future investment in the upstream in Malaysia as well, okay?

 Next slide. If you look at the project location and the map, basically, on the left-hand side, you'll see the project. Basically, this Train 9 is one -- is the part of the MLNG complex. So this MLNG complex comprise 4 projects, okay? The total capacity right now is 29 million tons per annum, and you'll see that it comprises MLNG Satu since 1983 and also MLNG Dua, MLNG Tiga, and then the MLNG Train 9. This is the new addition to the complex, okay?

 If you look at the map on your right-hand side, you'll see that we have the orange dot here. That basically -- and this is the location of the complex of the Train 9 and the MLNG complex. And basically, the feed gas that feed into this LNG complex basically came from those projects in the offshore Sarawak in Malaysia. And this is based on the long-term gas sale agreement as well.

 And if you look at the one in the top right, you'll see SK416-- 410B, SK410B that we kind of highlighted here. And this is our exploration project that we just acquired last year. If you remember that we own 42.5%, and we already operate there. We are now doing the seismic activity for this project, and we see quite a high potential of this one.

 And you'll see that this project with the rate line, which is a pipeline, this project is basically have the infrastructure that can feed the LNG feed gas into the MLNG complex as well. So basically, this provides a platform in the future for us to monetize our exploration project. So this is why we think it's kind of the strategic investment in this sense, okay?

 If you look at the next page, Page #4, structure. Okay. On the left-hand side, you'll see structure that we in PTT owns 50% in [PTTGL]. PTTGL is registered in Thailand. And then there is another level, called [PTTDOI], and that one is registered in Hong Kong. And this, basically, this PTTDOI owns 10% in the Train 9, in the [PL9 SB], which is the midstream, the liquefaction plant.

 Okay, and then for the PL9 SB . It also has the GSA with the feed gas provider, as already mentioned in the next slide, okay, and it also has the LNG SPA with the LNG buyer. So basically, this project, they buy feed gas at certain cost then they manufacture and convert free gas into the LNG. And they sell LNG to the buyers at a certain price, okay?

 And if you look at the chart on your right-hand side in terms of the net cash flow, we've been trying to kind of simplify and then give you in terms of how it looks like if you want to see how the cash flow work in this sense. So basically, the revenue which comes from the LNG sales, and then you have the feed gas costs, also have CapEx, and CapEx in this case would be minimal because the project is already running. So it will only be the minimal [in terms of] CapEx going forward. And you also have OpEx, of course, right? And then there's a corporate income tax that the project has to pay, about 24% in Malaysia. And that basically offset with the revenue and then become up with the net cash flow at the bottom, okay?

 So I think this is basically it for the presentation. If you have any question in terms of the investment, please feel free to ask.

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Questions and Answers
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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [1]
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 Yes, [Panita]. Ajay, here, again. Can you help us -- again, you've obviously given us a net cash flow model, but can you give us an example of roughly, based on a particular price of gas, what's the kind of earnings or number you can give us a sense on of how we should think about this? Is this more like irrespective effectively in number, which we should think more like a utility, which is a fixed set of just like PTT public has in terms of a fixed amount of money to get irrespective of utilization? Or is there a more utilization factor here? Some thoughts on that. Second question I had is, given the fact that JX themselves came in just a year ago, would you be aware of what they paid for that 10% stake for -- given the fact that it's in the same project?

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 Unidentified Company Representative,    [2]
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 Okay. Maybe start with the second question first, Ajay. Okay. I think -- rumor has it in the market that they paid $550 million. And I don't have a proof on that, okay? So this is rumor has it in the market, okay? And also, when you look at the net cash flow, I will say that, given the size of the investment net to assets, only $250 million. It's not $1 billion acquisition. So in this case, I will say that the contribution in terms of the profit or the free cash flow is not material compared to our corporate net income or our corporate cash flow.

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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [3]
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 No, I understand. But what I was trying to better understand, specifically, is it more like a utility set of earnings, which is irrespective of utilization of the fixed set of earnings? Or is there a utilization impact here? And so if the Train is 60% utilized, the earnings are much, much lower; 80%, they're much, much higher. And so if we can just walk through, do you expect this to -- that will be profitable as a result and, therefore, contribute positively to the bottom line?

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 Unidentified Company Representative,    [4]
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 Okay. In terms of the formula of the price, we basically cannot tell you. But what we can say is that, if you look at the diagram, when they buy the feed gas, they buy it at certain percent [linked] to [JCV]. Okay. And then when they sell the LNG, they sell it at certain percent of JCV . So you'll see the difference of those percentage is different, so that basically would be the profit right?

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 Ajay Mirchandani,  JP Morgan Chase & Co, Research Division - Senior Analyst   [5]
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 But just to confirm effectively in terms of utilization, is there a utilization impact, just if you sell lower amount of gas? As a result, there'd be lower earnings; and higher gas, higher earnings. Is that a fair way to think about it?

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 Unidentified Company Representative,    [6]
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 Yes, of course. But as I already mentioned, we have basically the LNG offtake agreement with a certain requirement in terms of the volume. So that basically would -- I don't say a guarantee, but that would secure at the certain level the utilization of the plant.

 Okay. Are there any further questions? Okay. It looks like there is no further questions then. Okay. Thank you so much for participating in the call. And if you have any follow-up questions, please feel free to e-mail us or reach us. Okay. Thank you. Bye-bye.

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 Chanamas Sasnanand,  PTT Exploration and Production Public Company Limited - VP of Capital and IR   [7]
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 Thank you.




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