Q3 2017 PTT Exploration and Production PCL Analyst Meeting

PTTEP.BK - PTT Exploration and Production PCL
Q3 2017 PTT Exploration and Production PCL Analyst Meeting
Nov 06, 2017 / 06:30AM GMT 

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Corporate Participants
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   *  Montri Rawanchaikul
      PTT Exploration and Production Public Company Limited - EVP of Strategy & Business Development Group
   *  Pannalin Mahawongtikul
      PTT Exploration and Production Public Company Limited - EVP of Finance and Accounting Group
   *  Phongsthorn Thavisin
      PTT Exploration and Production Public Company Limited - President of Exploration & Production
   *  Somporn Vongvuthipornchai
      PTT Exploration and Production Public Company Limited - CEO & Director

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Presentation
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Operator   [1]
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 Welcome to PTTEP in the Third Quarter of 2017 Analyst Meeting featuring the announcement of the company's operating performance of the third quarter of 2017. Before we commence the session, please allow me to introduce the company's executives who will be giving reports on the company's operating performance. First, Khun Somporn Vongvuthipornchai, Chief Executive Officer; second, Khun Montri Rawanchaikul, Executive Vice President, Strategy and Business Development Group; and 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.

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 Somporn Vongvuthipornchai,  PTT Exploration and Production Public Company Limited - CEO & Director   [2]
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 First of all, I would like to extend warm greetings to analysts and fund managers as well as PTTEP staff members participating in the analyst meeting today. This year, we have made an impressive achievement in terms of keeping the number of incidents lower than the industry average. Furthermore, during the fourth quarter, our operations in the Gulf of Thailand need to be aware of the climatic conditions in carrying out the work during the monsoon season, in which the company usually acknowledges the operators in order to make necessary preparations. Around the end of October, there was a tropical depression in the area, and we have mobilized our workforce from the area, while the sales of natural gas and condensate continued as usual. Apart from the harsh climate, the fourth quarter is also the period of time when we have to accelerate our activities in order to meet due dates. With this, we have informed the operation teams to be aware and be pre-cautious in order to mitigate the risk of possible incidents.

 In terms of sustainability, PTTEP has been selected to be a member of the Dow Jones Sustainability Indices for the fourth consecutive year and of the FTSE4Good for second consecutive year, while our corporate governance has been rated excellent by the IOD. All of these recognitions from the third-parties are the proof of our outstanding performance on sustainability.

 Now Khun Montri will update on the industry highlights.

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 Montri Rawanchaikul,  PTT Exploration and Production Public Company Limited - EVP of Strategy & Business Development Group   [3]
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 For the oil prices, the graph showed that the global oil prices have been picking up since the beginning of the third quarter of 2017 and remained quite stable afterwards. This was mainly driven by the balance between demand and supply, which has started to become more materialized due to the production costs among the OPEC members since March 2017. OPEC will hold another meeting on November 30 in considering whether to extend supply cut agreement or not. In this regard, a lot of analysts point to the view that the production cut agreement is highly likely to be extended. It is believed that the production cut by OPEC members is being replaced by the export volume for the U.S. Hence, the balancing point between oil market supply and demand is subject to the compliance of OPEC cut and the production volume from the U.S.

 From market consensus, the average oil price in the fourth quarter is around USD 54 per barrel and is expected to fluctuate in the narrow band of USD 50 to USD 57 per barrel in 2018. This is due to the fact that a continuous production from the U.S. is expected, while commitment on production cut from OPEC and non-OPEC, led by Russia, has also improved.

 For an update on the LNG market, in terms of domestic market, it can be noticed that the increasing LNG import has an impact the demand of natural gas in the Gulf of Thailand. Overall, oversupplied LNG conditions lead to low-spot LNG prices for the next couple of years, which resulted in some countries purchased-spot LNG for its domestic use rather than contracted LNG. However, we have seen a limited number of new LNG project sanctions due to low oil prices over the recent periods. Also, the charts on the right show that the Asian markets, both established markets and new markets, that is China, India and Bangladesh, will be key drivers for future LNG demand growth, which will have positive impact on future LNG prices and help LNG market rebalancing around 2022, 2023.

 The left diagram shows that the consumption of domestic gas has been suppressed due to the growth of LNG import, while imported gas volumes from Myanmar remained stable. In the meantime, it can be seen from the chart that the amount of natural gas consumed by Electricity sector tend to decrease, which was mainly caused by a rise in renewable source of energy. All in all, natural gas remains as a main source of energy for electricity generation in Thailand, even though its proportion has been slowly declining.

 Before going through the financial part, let's move on to exchange rate. The current exchange rate is about THB 33.3 per U.S. dollar. There are many factors affecting the exchange rate such as the interest rate and financial policy, which would potentially cause the appreciation of the U.S. dollar.

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 Pannalin Mahawongtikul,  PTT Exploration and Production Public Company Limited - EVP of Finance and Accounting Group   [4]
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 Speaking of financial performance, there are 3 key drivers determining our performance, including sales volume, average selling price and unit cost. Sales volume has dropped by about 8% from 320,600 barrels of oil equivalent per day in the first 9 months of 2016 to 294,539 barrels of oil equivalent per day in the first 9 months of 2017.

 Fortunately, the global oil price was upturned during the period, leading to an improved average selling price of 6% from USD 36 per barrel of oil equivalent in the first 9 months of 2016, to USD 38.29 per barrel of oil equivalent in the first 9 months of 2017. Meanwhile, the volume mix between gas and liquid has remained 70-30 as usual, which is in accordance with our strategy to emphasize on gas-weighted portfolio going forward.

 In terms of the unit cost, we have made a considerable progress so far as we bought the unit cost down further from USD 30 per barrel of oil equivalent level in the first 9 months of 2016, to USD 28.36 per barrel of oil equivalent in the first 9 months of 2017. The unit cost breakdown table represented that despite of the slight increase in cash cost, the depreciation, depletion and amortization expenses helped improve the unit cost as it has dropped from USD 17.88 per barrel of oil equivalent to USD 15.11 per barrel of oil equivalent, mainly due to the significant addition of reserves at the end of 2016, coupled with lower recognition of completed asset. Nevertheless, the finance cost has risen slightly from that of the first 9 months of 2016, due to the effect of lower sales volume in this period. Also, the royalty expenses have moved up from that of the first 9 months of 2016, following the high average selling price.

 The general and administrative expenses per unit has also increased by about USD 0.30 per barrel of oil equivalent and half of which was due to the effect of lower sales volume as well as the adjustment of charge-out fees from partners by about USD 0.1 per barrel of oil equivalent.

 On the other hand, the exploration expenses have dropped quite significantly this period due to the fact that there were 2 permit write-offs in the first 9 months of 2016 of around USD 30 million from Australia and Kenya assets. Moreover, majority of seismic activity this year have been completed and is in the process of assessment. The operating expenses per unit has increased by around USD 0.8 per barrel of oil equivalent from USD 4.86 per barrel of oil equivalent in the first 9 months of 2016, to USD 5.68 per barrel of oil equivalent in the first 9 months of 2017, whereby around USD 0.5 per barrel of oil equivalent was due to the lower sales volume effect, and another USD 0.3 per barrel of oil equivalent was due to the recognition of net realizable value on inventory, which has caused low operating expenses in the first 9 months of 2016, while the figure has come back at its normal level in the first 9 months of 2017. These are all the summary of key drivers for the company's performance.

 The recurring net income has increased from USD 345 million in the first 9 months of 2016, to USD 596 million in the first 9 months of 2017, representing a strong core performance. However, the company net income for this period stood at USD 305 million as it was condensed by loss from non-recurring items of USD 291 million. The loss from non-recurring items included the recognition of impairment loss of USD 558 million in this quarter, due to the revision of the development plan and the delay of the final investment decision for the Mariana Oil Sands Project in Canada. Nonetheless, the impairment loss was offset with a tax savings of USD 267 million from the baht appreciation against U.S. dollar during the period.

 The baht currency is currently strengthened against U.S. dollar currency, which resulted in the recognition of tax benefit during the period. However, there is a possibility that the Federal Open Market Committee may decide to hike the interest rate, leading to depreciation of baht against U.S. dollar, which would result in negative impact on the company's performance. As we always mention that every THB 1 weakening against U.S. dollar, the company's tax expenses will be increased around USD 90 million to USD 100 million. However, this is owing to the currency for tax filing, and the government is now in the process of revising the tax law concerning this particular issue. Once the law is enacted, the impact can be considerably alleviated.

 Over the first 9 months of 2017, we have generated operating cash flow amounting to USD 1,617 million, which is in line with our financial projection given the current oil price scenario. For the use of funds, the investment accounted for about USD 1 billion, which can be further classified into CapEx and investment with PTT through PTTGL in the liquefaction plant called the MLNG Train 9 Project of about USD 250 million. The remaining uses of fund were for a dividend payment, interest payment and finance cost, totaling USD 572 million. To sum, the total use of funds was USD 1,584 million. And our solid cash flow generation could cover uses of funds for investment, dividend and debt services.

 Talking about our financial position, the total assets at the end of this quarter has declined marginally compared with the end of 2016, mainly from the impairment of USD 558 million, together with the decrease in PP&E from depreciation of about USD 300 million, while the investment has increased by about USD 260 million. Also, the current asset has increased from the cash flow generated and higher accounts receivable, mainly from PTT. On the liability side, the total liabilities have dropped by USD 118 million due to lower income tax payable and deferred tax liabilities. On the other hand, account payable has increased by USD 52 million. Equity has decreased by USD 157 million due to the dividend payment of USD 459 million, while the net profit for the first 9 months of 2017 has been booked at USD 305 million.

 The debt profile is 100% in U.S. dollar currency. The weighted average cost of debt has increased slightly from higher floating interest rate. The proportion of fixed and floating debt remained at 80-20, while the average loan life decreased from 8.15 to 7.40 years.

 The financial outlook is somehow similar to what has been provided to you earlier. We are still confident that the average sales volume for full year 2017 should be around 300,000 barrels of oil equivalent per day level, and that the sales volume in the fourth quarter of 2017 is expected to increase as the company endeavored to uplift liquid production to cope with concern of PTT's low gas nomination. This has so far been quite successful, and CEO will share more in details shortly.

 The average gas price is expected to be about USD 5.6 per MMBTU, meaning that the average gas price in the fourth quarter of 2017 will improve slightly. Meanwhile, the unit cost is likely to be around USD 29 per barrel of oil equivalent, increasing slightly in the fourth quarter of 2017, mainly due to the recognition of more complete assets. Last but not least, the EBITDA margin is to be consistently maintained at 70%.

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 Somporn Vongvuthipornchai,  PTT Exploration and Production Public Company Limited - CEO & Director   [5]
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 For operational updates and outlook, currently and going forward, the company maintains priority on the producing projects in order to achieve the target sales volume of around 300,000 barrels of oil equivalent per day, while maintaining the unit cost at around USD 29 per barrel of oil equivalent.

 Subject to the conditions in long-term gas sales agreement with buyers, some projects in the Gulf of Thailand may have carryforward gas volume from the previous years. The buyers could exercise such carryforward volume through lower natural gas nomination in the current period, which we have seen the impact to the lower sales volume of the company, especially in the second quarter of 2017. Hence, the company has initiated and implemented mitigation plan to uplift the production volume in a number of projects.

 With regards to the S1 Project, the issue about the land reform has been resolved. Many activities are being performed and we are now preparing to access the new areas for further activities. However, this still requires a lead time before production can be realized from the areas.

 For projects in Myanmar, the emphasis is placed on delivering higher sales volume to capture demand in Myanmar domestic market. Meanwhile, for the Montara project, we ensure the reliability of the equipment and we are executing the drilling activities, which we could benefit from lower rig cost. Through integration of all lessons learned and experience, we are quite satisfied with the drilling results and would expect production from such wells over the next 2 weeks. For Bongkot and Arthit projects with low gas nomination and competition from LNG, our focus also extends to maximizing liquid production. Production contributed from these initiatives would enable us to achieve the sales volume target of around 300,000 barrels of oil equivalent per day.

 For our Mozambique project, PTT's Board of Directors has approved the LNG offtake agreement of 2.6 million tons per annum, which marked a significant progress for the project. The proposed agreement is now under consideration of regulatory bodies before PTT can sign the LNG agreement. Moreover, the project consortium is now in the process of negotiating with the financial institutions for the project financing. On regulatory and operational sides, plan of development which requires the government's approval will serve as a master plan for the project's development. Resettlement activities are under preparation and should be commenced very soon. For this project, we expect the first production by the year 2022 to 2023.

 We aim to fast-track the development of Algeria HBR project, which is our second project in Algeria, following the successful Exploration campaign. We are currently working with our partners to submit the plan of development to the government for approval before making final investment decision, expected by the end of this year or early next year.

 For our Ubon Contract 4 project, we are in the phase of conducting studies together with the operator, Chevron, in order to make the final investment decision in the future. A new addition to this predevelopment projects list is Southwest Vietnam project. This project is located in the Vietnamese water, east side of the Thailand Vietnamese maritime boundaries where Arthit Project locates in the west side of such border. The company's stake in the project is quite marginal of about 7% to 8%, where PetroVietnam is the operator and MOECO is the joint venture partner of the project. The agreement on gas price has been signed. Further commercial details and contracts are finalizing, and the investment decision shall be concluded by the first half next year.

 Now I would like Khun Montri to share with you on the updates for the expiring concessions and new investments.

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 Montri Rawanchaikul,  PTT Exploration and Production Public Company Limited - EVP of Strategy & Business Development Group   [6]
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 I believe analysts and investors are interested to know more about the expiring concession bidding as well as the company's growth opportunity. Currently, the related ministerial regulations are under the Office of the Council of State's consideration. Once the ministerial regulations have been enacted, the terms of reference, or TOR, with the likely fiscal regime to be production-sharing contract will be announced at around the end of 2017, and the tendering process can then be commenced in early 2018, and bid results can be expected around the end of the first half of 2018.

 With our long experience in operating the field, understanding in the subsurface, operational efficiency and potential synergies in the Gulf of Thailand operations, we are ready to participate the upcoming bidding for the expiring concessions, especially the Bongkot project.

 In terms of mergers and acquisitions, we see very low number of merger and acquisition deals in Southeast Asia during the past few years when there was a big gap in price expectation between buyers and sellers. Rather, the majority of global mergers and acquisition deals have been taking place in the U.S. shale and oil sands projects over the past few years. Given that the oil prices have started to stabilize, the company continues to actively seek merger and acquisition opportunities, in which Southeast Asia is our key focus area. Given limited opportunities in Southeast Asia, the company also looks at merger and acquisition opportunities in other potential areas with low risks, relatively low cost and are in the producing stage, and Middle East is one of the potential areas that we are looking to identify new investment opportunities.

 From the map on top of the slide, the areas in the dark blue circles are our areas of focus in terms of mergers and acquisition, that is near-producing or producing assets in Southeast Asia and the Middle East, while the areas in the light blue circles are possible areas to expand for investment in exploration acreages, which are expected to have high petroleum potential for the contribution in the longer term. On the cooperation with PTT in the investment in the LNG value chain, the joint venture company acquired 10% interest in MLNG Train 9, which is an LNG liquefaction plant in Malaysia, during the third quarter of 2017. PTTEP and PTT see the benefits of value created from investing in the whole LNG value chain for upstream, midstream and downstream together, which will ultimately enable growth for PTTEP in the long run.

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 Somporn Vongvuthipornchai,  PTT Exploration and Production Public Company Limited - CEO & Director   [7]
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 Before we proceed to the Q&A session, I would like to give a quick update on the company's management and organization. We have implemented our strategy of RESET-REFOCUS-RENEW since 2016. RESET aims at having a resilient and competitive cost structure to cope with the oil price volatility. REFOCUS is for our investment strategy, which focuses on Southeast Asia and other potential areas and is inclined toward gas and LNG projects, which we believe are in line with the global trend. RENEW is to retain competitiveness in a sustainable manner through enhancement of capabilities and technology and improvement on work processes as well as consideration on the global trends of the renewable and disruptive technology.

 With this strategy, going forward, the Board of Directors has approved the company's reorganization and the position, President, has been introduced to supervise the entire cycle of E&P activities ranging from exploration, development, production and operations support. The CEO, myself, will be in charge of the strategy, business growth and expansion, including mergers and acquisition, business and organizational transformation, human resources, finance and accounting and corporate affairs and assurance, including corporate governance, risk management and compliance.

 I would like to take this opportunity to introduce PTTEP's President of Exploration and Production, Khun Phongsthorn Thavisin, one of the pioneers of this company.

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 Phongsthorn Thavisin,  PTT Exploration and Production Public Company Limited - President of Exploration & Production   [8]
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 I started my career in the petroleum industry with Unocal Thailand in 1985, working there as a production engineer in charge of the Erawan and Banpot fields, one of the 4 fields in Thailand back then, Erawan, Banpot, Satun and Plathong. I then joined PTTEP to work at the Bongkot field. I was there since the beginning of the development and took care of the field's operations. I was also seconded to France to work with Total for quite a while. After I returned to Thailand, I first worked for the Arthit project before moving on to international assets, that is Vietnam, Oman, Iran and Algeria, and the corporate safety team promoting the campaign, take SSHE to your heart, make it part of your life, with the aim of building a safety culture in the company. I later moved to the engineering and construction team to take care of the Bongkot South and Zawtika Project before being appointed as the Chief Operating Officer to lead all the company's operating assets and operations support. In support of the CEO's direction to transform the organization, my responsibilities as President will be to ensure the efficiency and the effectiveness in execution of activities in the entire E&P value chain covering operating assets and operations support as well as engineering, development and exploration.

 We believe that managing activities across the whole value chain will create synergies and lower costs in several ways. The organizational transformation will create more flexibility for the organization to identify and invest in new businesses. Given the current global trend for clean energy, for example, electric vehicle cars, renewable energy, et cetera, although the E&P sector will continue to be of integral significance in the short to medium term, it is likely to gradually be overshadowed over time, and the company, therefore, needs to adjust and seek investments in new businesses to ensure our sustainability in the future.

 Last but not least, I would like to ensure you about our competitive position in the upcoming bidding for expiring concessions in Thailand, as we are a cost-efficient operator in the area and have extensive experience in the field's operations since the beginning. Moreover, our key predevelopment projects, for example, Mozambique LNG and Algeria HBR, will be driven towards the investment decision and execution in a timely manner. On a final note, I believe that this reorganization will add value and contribute to the improvement of the company's exploration and production activities in the long run.

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 Somporn Vongvuthipornchai,  PTT Exploration and Production Public Company Limited - CEO & Director   [9]
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 With Khun Phongsthorn's leadership and vision over the full range of exploration and production activities for PTTEP, the company strongly believes that it will be successful in its mission. Now I would like to proceed to the Q&A session.

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Questions and Answers
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 Unidentified Analyst,    [1]
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 Please discuss around the low nomination of natural gas situation and operational outlook for remaining of the year and next year.

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 Unidentified Company Representative,    [2]
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 During the first half of 2017, domestic gas demand for power generation did not grow as we, or PTT, expected due to increased output from renewable power. With LNG, cargoes have been procured and stocked up for higher demand scenario. This led to the low nomination for natural gas from the Gulf of Thailand during the first half of the year. However, during the second half 2017, the condition has been adjusted, which we have seen improving situation on the natural gas nomination from Gulf of Thailand. Regarding the operational outlook for 2018, the company targets to maintain sales volume at 300,000 barrels of oil equivalent per day level and low-cost base at around USD 30 per barrel of oil equivalent. In addition, we would like to enhance our R/P ratio for mergers and acquisition execution and bidding of expiring concessions in the Gulf of Thailand.

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 Unidentified Analyst,    [3]
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 For predevelopment projects, what is your view on the valuation of the Southwest Vietnam project? What is the assumption for the Mozambique LNG project for the impairment test?

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 Unidentified Company Representative,    [4]
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 The company cannot comment on the exact valuation of the projects. The current valuation and gas price agreed earlier in September satisfied the current joint venture partners to proceed with the Southwest Vietnam project. For Mozambique LNG project, we have to perform the impairment test for the project at least once a year, and no impairment is identified from the previous impairment test as there is no significant delay in the project's startup, around 2022 to 2023, larger resources comparing with when we acquired the project, and potential development cost reduction.

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 Unidentified Analyst,    [5]
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 Could you please update on the merger and acquisition activities?

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 Unidentified Company Representative,    [6]
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 There are a few ongoing merger and acquisition activities that we are pursuing, and we expect results from these activities around the end of the year or earlier next year.

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 Unidentified Analyst,    [7]
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 Regarding the news on the tropical depression, is there any impact to the company's production volume?

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 Unidentified Company Representative,    [8]
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 There is no impact to the company's production volume from the tropical depression in the Gulf of Thailand.

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 Unidentified Analyst,    [9]
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 Talking about new businesses, what will be the area of focus?

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 Unidentified Company Representative,    [10]
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 We believe oil will still be a major contributor for energy consumption for at least 20 to 30 years. Natural gas and renewables should play an increasing role in energy supply. Our current priority is to maintain our core strength in oil and gas business and, therefore, the studies on the technology to enhance our performance in the oil and gas business are ongoing. In addition, we have set up a new business unit to explore opportunities in E&P-related business, natural gas chain as well as monitoring impacts and business prospects that would emerge from disruptive technologies.

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 Unidentified Analyst,    [11]
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 Regarding the bidding of expiring concessions, what is the current progress and the impacts from the delay in the bidding timeline?

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 Unidentified Company Representative,    [12]
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 The company is well-prepared for the bidding. For our Bongkot, in which we place high emphasis on the continued of the production, there should be no impact to the field's production if the bidding results are announced within next year, or 2018. However, we note that the delay would result in increasing inflexibility in the preparation and higher cost for the winner. For Erawan, we are discussing with the current joint venture in order to form a consortium for the bidding, but we are also ready to bid if such agreement could not be reached.

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 Unidentified Analyst,    [13]
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 From the news on the setting up a new company in Mexico, what are the rationales for the investment?

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 Unidentified Company Representative,    [14]
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 Mexico and Brazil are areas with high potential and competitive cost structure, in line with our investment strategy. Also, the investment in these areas would incur low upfront cost, entry via bidding round, and we would form a consortium with prudent partners who has experience in those areas.




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