Q2 2017 PTT Exploration and Production PCL Analyst Meeting
Aug 09, 2017 AM EDT
PTTEP.BK - PTT Exploration and Production PCL
Q2 2017 PTT Exploration and Production PCL Analyst Meeting
Aug 09, 2017 / 06:00AM GMT
==============================
Corporate Participants
==============================
* Montri Rawanchaikul
PTT Exploration and Production Public Company Limited - Acting EVP of Strategy and Business Development Group
* Pannalin Mahawongtikul
PTT Exploration and Production Public Company Limited - EVP of Finance and Accounting Group
* Somporn Vongvuthipornchai
PTT Exploration and Production Public Company Limited - CEO, President and Director
==============================
Presentation
------------------------------
Unidentified Company Representative, [1]
------------------------------
Welcome to PTTEP in the second quarter of 2017 Analyst Meeting, featuring the announcement of the company's operating performance of the second quarter of 2017.
Before we commence the session, please allow me to introduce the company executives who will be giving reports on the company's operating performance. First, Khun Somporn Vongvuthipornchai, President and Chief Executive Officer; second, Khun Montri Rawanchaikul, Executive Vice President, Strategy and Business Development Group; third, Khun Pannalin Mahawongtikul, Executive Vice President, Finance and Accounting Group.
And without further ado, please join me in welcoming Khun Somporn to begin the presentation.
------------------------------
Somporn Vongvuthipornchai, PTT Exploration and Production Public Company Limited - CEO, President and Director [2]
------------------------------
We have maintained great emphasis on our safety performance. Activities in the first quarter of 2017 included onshore activities in new terrains in Myanmar, which were quite tough and involved new contractors, leading to incidents in the first quarter of 2017. However, in the second quarter 2017, the situation has resumed to its normal condition with zero incident. To-date, our lost time injuries incidents per million man hours is 0.13, which is considered better than that of the industry average.
For the Dow Jones Sustainability Indices in which its considerations involve 3 dimensions: business growth, social progress and environmental stewardship, we are now in the process of submitting information. One of the challenges is the ongoing issue on Indonesia claims in which we are confident in our evidences on hand.
Now I would like to Khun Montri to discuss the industry highlights.
------------------------------
Montri Rawanchaikul, PTT Exploration and Production Public Company Limited - Acting EVP of Strategy and Business Development Group [3]
------------------------------
In this section, I would like to go through the industry highlights, oil price situation as well as the mergers and acquisition opportunities. The graph shown that the oil price in the second half of 2017 has been quite volatile in a rather narrow band, which is mainly due to the imbalance between demand and supply. It could be seen that despite both OPEC and non-OPEC's efforts in controlling on production output, the supply still remained quite excessive while the demand could not cope up with the supply. Throughout the second quarter of 2017, there have been a number of issues and movements, that is the instability of Middle East from the diplomatic tension in Qatar as well as the resumed production in Libya and Nigeria.
Turning to oil price outlook for the second half of 2017, Bloomberg suggested that the oil price will be around USD 53 per barrel while PTTEP's forecast is in the range of USD 45 to USD 50 per barrel. From the preceding quarter, the oil price hit the lowest point at around USD 42 per barrel and currently fluctuates between USD 45 to USD 50 per barrel. Nevertheless, there are uncertainties regarding the market outlook in the near future with numerous factors involved that is uncertainties around economic policy in the U.S. as well as potential U.S. sanctions against Venezuela and Russia. All things considered, we believe that the oil price will remain in this aforementioned range.
The charts clearly exhibit that the majority of merger and acquisition deals during 2016 to 2017 took place in North America, especially in the U.S. and Canada while there were limited number of deal counts and of small deal value in Asia. Henceforward, for the merger and acquisition outlook, the majority of merger and acquisition deals is going to take place quite rapidly, especially in North America and much less so in Asia. I believe that the concession expiry is now being a hot issue.
I would like to update on new Thailand Petroleum Act, which introduced the concepts of Production Sharing Contract. This slide compares between 2 fiscal regimes: Thailand III and Production Sharing Contract. For their current regime, Thailand III concession system, the remaining amount from the revenues after royalties, special remunatory benefits and tax will be net to the concessioner. For Production Sharing Contract, 10% of revenue will be allocated as the royalty. After that, there is a cost recovery in order to reimburse the production cost at the maximum of 50% of the annual revenue. The remaining cost recovery can be accumulated and can be reimbursed in later years. Then the revenue after deducted by royalty and cost recovery, so called the profit, will be shared equally between the government and a contractor. Contractor entitlement, which comprises of cost recovery portion and contractor's profit will be used as a basis to calculate tax with a tax rate of 20%.
PTTEP has been familiar with this Production Sharing Contract regime as the company operates with these terms in the MTJDA project in Malaysia-Thailand joint development area. However, the announcement, of which regime, either Thailand III concession system or Production Sharing Contract that will be applied on the upcoming concession expiry has not yet been finalized, as the subject is now being submitted by the Ministry of Energy to the Cabinet by next week, and the outcome is expected to be September 2017.
------------------------------
Pannalin Mahawongtikul, PTT Exploration and Production Public Company Limited - EVP of Finance and Accounting Group [4]
------------------------------
The sales volume in the first 6 months of 2017 stood at 292,709 barrels of oil equivalent per day, decreasing by 10% from that of the first 6 months of 2016, mainly due to lower crude loading of the PTTEP Australasia project, compared with the previous year by 2 loads; longer shutdown for maintenance activities of the MTJDA project; the low nomination issue as mentioned before; as well as the missing sales volume from Oman divestment at the end of previous year. Also there was higher shutdown maintenance for the Bongkot Project, coupled with a temporary suspension of the S1 project related to the Agricultural Land Reform, ultimately leading to weaker sales volume than that of last year.
On the other hand, the weighted average selling price was increased by 6%, mainly driven by better liquid price from USD 37.61 per barrel in the first 6 months of 2016 to USD 50.63 per barrel in the first 6 months of 2017, even gas price marginally fell by 7% from the first 6 months of 2016. In summary, the sales volume was softened while the weighted average selling price improved.
For cost side, the unit cost was brought down further by 4% from USD 29.42 per barrel oil equivalent in the first 6 months of 2016 to USD 28.29 per barrel of oil equivalent in the first 6 months of 2017 due to lower depreciation, depletion and amortization resulting from reserves addition at the end of 2016, whilst other components including finance cost, general and administrative expenses and operating expenses per unit were increased as an impact from lower sales volume without significantly movement in absolute figures.
The increase in royalties was in line with oil prices. Nevertheless, the exploration expenses were declined from same period last year because during the first 6 months of 2016, we had a high seismic cost from exploration project in Brazil and 2 permits withdrawal exploration block in the PTTEP Australasia project. Like previously mentioned, the lifting cost also raised from USD 3.97 per barrel of oil equivalent in the first 6 months of 2016 to USD 4.01 per barrel of oil equivalent in the first 6 months of 2017 due to lower sales volume effect. According to the success ratio of 0:4 in this period, I would like to clarify that the drilling rationale was to ensure petroleum potential in those areas, which the write-off expenses of those 4 wells were lower than that of land retention payment.
From the aforementioned performance, the company reported net profit of USD 569 million for the first 6 months of 2017 comprising of recurring net income of USD 378 million and gain from nonrecurring items of USD 191 million, mainly attributed by tax savings from the strengthening in Thai baht currency against U.S. dollar currency by approximately THB 2 per U.S. dollar during the period, coupled with the oil price hedging gain amounting to approximately USD 30 million.
The operating cash flow remained strong at approximately USD 1 billion, which is on track with our target full year operating cash flow of about USD 2 billion, depending on global oil prices, and EBITDA margin was also maintained healthy at 71% level. During the first half of 2017, the company was in self-funding position, which covered CapEx spending of USD 500 million and the remaining of USD 300 million was served debt service and dividend payment.
Talking about capital structure, the asset as of June 2017 reduced slightly from the end of 2016 due lower property, plant and equipment. As a result, higher depreciation expense recognition. The interest-bearing debt remained pretty much the same at USD 2.8 billion, only with a slight difference from Baht Bonds translation. The equity increased following higher profit less dividend payment from USD 11,386,000,000 at the end of 2016 to USD 11,659,000,000 as of June 2017.
The company's debt profile was 100% in U.S. dollar currency as usual, while the weighted average cost of debt was 4.46%, and the ratio between fixed and floating interest rate was 80:20. The average loan life dropped slightly to 7.71 years. As reported to the stock exchange of Thailand, the interim dividend for the first 6 months of 2017 payment was THB 1.05 per share equivalent to the payout ratio of 30%. The payment date is August 25, 2017.
The guidance on financial outlook was updated as follows: The average sales volume in the third quarter of 2017 and full year 2017 have been projected to be about 290,000 and 300,000 barrel of oil equivalent per day, respectively. In the meantime, the average gas price in the third quarter of 2017 is likely to be around USD 5.6 per MMBtu, and USD 5.5 per MMBtu for the whole year of 2017, meaning that the gas price in the fourth quarter of 2017 will slightly decline.
The unit cost in the third quarter of 2017 is estimated to be at USD 30 per barrel of oil equivalent due to planned maintenance activities, whereas the full year, we expect to stay at USD 29 per barrel of oil equivalent, reflecting our best effort to maintain our low cost base. Lastly, the 2017 EBITDA margin will be maintained at 70% level.
------------------------------
Somporn Vongvuthipornchai, PTT Exploration and Production Public Company Limited - CEO, President and Director [5]
------------------------------
This section will cover operational updates and outlook for the remaining of 2017. As provided in the guideline, it is our goal to maintain sales volume at around 300,000 barrels of oil equivalent per day and the unit cost not higher than USD 30 per barrel of oil equivalent.
With regards to the sales volume in the first half of 2015 (sic) [2017], there were impacts from the low nomination of natural gas in the Gulf of Thailand, the case concerning the Agricultural Land Reform and the routine planned maintenance. Regarding the land reform issue for the S1 project, after the government exercised Section 44, allowing us to operate in the land reform areas, the operation has then resumed after our temporary partial suspension. And currently, the production has been at its normal level at around 27,000 to 28,000 barrels per day of crude. We are now complying with the procedures that have been temporarily waived by the government.
Meanwhile, there are a few areas that have never been accessed due to the restriction on the land reform in which we are now in the process of preparing documents to submit in accordance with the regulations, and we expect the production from such new areas late this year or early next year. For Myanmar projects, there was nil or very limited impact of LNG import to the nomination of gas from Myanmar projects, and we have seen higher demand for natural gas in Myanmar. We, therefore, try to ensure the production as targeted as well as to increase sales in the domestic market in Myanmar.
For the Montara field in which we have 100% ownership, we have adjusted the schedule by accelerating the development well drilling from next year to the second half of this year as the oil prices have become more stable and rig rates would be in the favorable terms. In the meantime, we can maximize the production of condensate in the Bongkot and Arthit project fields in order to partly compensate the lower gas sales due to low nomination of natural gas. All in all, these are the mitigation plans that we are focusing on in the second half of the year in order to meet sales volume and unit cost targets. Apart from that, we are getting prepared to participate in the bidding for Bongkot and Erawan. We are currently discussing with the current partners of the Erawan to formulate the bidding consortium. Also, we expect the term of reference for the bidding will be launched very soon.
Before we proceed to the next slide, I would like to address some of the low level of exploration activities in 2017. It was due to the postponement of high-risk wells drilling in light of the volatile oil prices during 2015 to 2016. Recently, we have adjusted the exploration portfolio to reflect more stability of oil prices, and we expect more drilling activities in 2018. As mentioned earlier by Khun Pannalin, this year, our drilling activities mostly took place in order to retain exploration acreages, which we drilled wells instead of paying the retention fee.
This slide mainly discusses predevelopment projects and merger and acquisition opportunities. During this quarter, there was a clearer picture in terms of regulations in Mozambique. The government of Mozambique has approved the marine concessions, which summarize the rights to build, utilize ports and export LNG. Following this, the resettlement action plan would begin in the second half of 2017. Meanwhile, we have been trying to conclude the gas sales agreement with potential buyers, including PTT. In parallel, we are also discussing and negotiating with the financial institutions to support the project finance.
For Algeria HBR, we are now trying to finalize our large-sized oil field in Algeria with the expected production of 50,000 barrels per day in order to add reserve and accelerate production. This includes the development Phase 1 of 10,000 to 13,000 barrels per day, which would accelerate the revenue generating and allow us to collect the data to ensure the potential of the field. In the meantime, we are now actively working with the operator to conclude the study for Ubon field in the Contract 4 project.
We have always placed emphasis on securing merger and acquisition deals, and we are fully aware of the investors' intention to see tangible growth and optimal use of capital. As mentioned in the previous section, the number of concluded deals in Southeast Asia remained quite limited. Hence, it is necessary that the company looks into other prolific areas beyond Southeast Asia. This also extends to the exploration portfolio that we might look into opportunities in other prolific areas such as Brazil and Mexico, which a key strategy is to ensure that we have good partners in such areas.
Last but not least, the LNG value chain is a way to diversify in order to mitigate the risk from reliance, mainly on major assets in the Gulf of Thailand. We have joined hands with PTT to invest in the upstream and midstream of LNG businesses. Going forward, LNG will be one of the key strategic growths -- it is going to be one of Thailand's primary sources of energy.
Next, Khun Montri will share the details of the recent investment in the LNG project with Petronas.
------------------------------
Montri Rawanchaikul, PTT Exploration and Production Public Company Limited - Acting EVP of Strategy and Business Development Group [6]
------------------------------
To reiterate what has been mentioned by the CEO, we have been looking into opportunities to invest in the LNG businesses. The MLNG Train 9, which is part of MLNG complex, is located in Sarawak, Malaysia, and our partners in the project are: Petronas, holding 80%; and JX Nippon, holding 10%. The investment rationale is to venture into midstream LNG as a means to secure LNG supply and growth of PTT and PTTEP. The capacity of MLNG Train 9, which is a new train that has just commenced production in early 2017, is 3.6 million tons per annum.
The investment structure is that PTTEP, through its subsidiary, jointly invested together with PTT by way of establishing a joint venture company called PTT Global LNG or PTTGL with 50% stakes for each party. With PTTGL, a subsidiary called PTTGLI has been established to hold 10% ownership in the MLNG Train 9, which is also called PL9SB. There is a highly market secured opportunity which includes in-place facilities and gas sales agreement. Furthermore, there are a number of gas fields at offshore Sarawak areas, from which gas has been fed into this MLNG complex.
Regarding the LNG process, first, feed gas is supplied into the complex. Then, acid gas, mercury and other contaminants will be separated and removed. The next critical process called liquefaction is converting gas into liquid form using a very low temperature. The liquefied natural gas will then be filled into the tank before getting shipped and sold. All in all, investing in this project enabled us to be involved in the midstream LNG business, which is part of our strategic direction to seek investment opportunities in the LNG value chain to support future growth.
As you can see, we can maintain competitive cost base and strong margin, while the challenge lies in capitalizing on the investment capital effectively by way of selecting appropriate merger and acquisition deals in order to support growth. Besides Southeast Asia, our geographical focus, both for mergers and acquisition and exploration, would be expanded into other prolific areas.
In terms of mergers and acquisitions, our emphasis will be on the merger and acquisition deals that we could deploy our competitive advantages. For exploration, the key considerations are the petroleum potential of that particular area and whether we could find the partners who are prudent and have the right capabilities.
Now I would like to open the floor for Q&A.
==============================
Questions and Answers
------------------------------
Unidentified Analyst, [1]
------------------------------
For cooperation with PTT on LNG business, which part of the LNG value chain does PTTEP and PTT focus on?
------------------------------
Unidentified Company Representative, [2]
------------------------------
PTTEP and PTT have incorporated a new joint venture company, called PTT Global LNG, to invest in LNG value chain projects globally. The current focus is on the upstream and liquefaction parts of LNG projects. However, it may be extended to LNG trading and shipping, depending on our future LNG portfolio.
------------------------------
Unidentified Analyst, [3]
------------------------------
Regarding the third-party access policy and liberalization of the LNG importation, including the news on EGAT importing 1.5 million tons per annum of LNG in 2018 and floating storage regasification storage unit businesses, what is the impact to the company?
------------------------------
Unidentified Company Representative, [4]
------------------------------
The policy will improve competition in the domestic market, which allows new competitors to import and access LNG liquefaction and other infrastructure. PTTEP, as part of PTT group, is certain that we will be able to compete with other new players on a cost competitive basis given our long term offtake LNG agreements and experience with the LNG market. It should also be highlighted that the development of third-party access, especially for the floating storage regasification unit front, will take some time.
------------------------------
Unidentified Analyst, [5]
------------------------------
As the company places high focus on gas and LNG in its current strategy, could you please share your view on the strategy of oil asset investments?
------------------------------
Unidentified Company Representative, [6]
------------------------------
In the long run, until year 2040, the company's view, which is in line with market view, is that oil will remain the key contributor of global energy supply. However, its growth will be relatively flat. On the other hand, gas is expected to continue its growth as well as renewable energy. We will consider the investment in oil assets based on the attractive return and ability to monetize within the time frame.
------------------------------
Unidentified Analyst, [7]
------------------------------
In terms of the bidding of the expiring concessions, i.e., Bongkot and Erawan, as there is still uncertainty around the fiscal regime for the bidding, could you please elaborate on the government take for each possible fiscal regime and the different from the Thailand I regime that is currently used for both projects?
------------------------------
Unidentified Company Representative, [8]
------------------------------
From the news, the possible fiscal regime to be applied for the bidding would be Thailand III regime or Production Sharing Contract, PSC, regime. The government take for both regimes from their interpretation of the recent Petroleum Act would be in the range of 70% to 80%, which would also depend on oil prices. Such government take of Thailand III and Production Sharing Contract is apparently higher than the Thailand I.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------