U.S. markets closed

Edited Transcript of PTTEP.BK earnings conference call or presentation 11-Feb-20 6:30am GMT

Q4 2019 PTT Exploration and Production PCL Earnings Presentation

Bangkok Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of PTT Exploration and Production PCL earnings conference call or presentation Tuesday, February 11, 2020 at 6:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Natruedee Khositaphai

PTT Exploration and Production Public Company Limited - EVP of Strategy & Business Development Group

* Phongsthorn Thavisin

PTT Exploration and Production Public Company Limited - CEO, President & Director

* Sumrid Sumneing

PTT Exploration and Production Public Company Limited - EVP of Finance & Accounting Group

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to PTTEP's year-end 2019 analyst meeting featuring the announcement of the company's operating performance in the year 2019. In this session, our President and Chief Executive Officer, Khun Phongsthorn Thavisin, will share PTTEP's 2019 highlights and beyond; followed by Khun Natruedee Khositaphai, Executive Vice President, Strategy and Business Development Group, to provide an update on strategic direction and growth for PTTEP; and Kuhn Sumrid Sumneing, Executive Vice President, Finance and Accounting Group, to summarize PTTEP's financial performance in 2019.

And without further ado, please join me in welcoming the CEO to commence the presentation.

--------------------------------------------------------------------------------

Phongsthorn Thavisin, PTT Exploration and Production Public Company Limited - CEO, President & Director [2]

--------------------------------------------------------------------------------

First of all, I would like to extend warm greetings to analysts and honored guests. Earlier this year, we had a role change in the form of job rotation to prepare the organization for the future. Khun Montri, who used to be in charge of strategies, planning and new business opportunities, is now supervising all of PTTEP's producing assets. Meanwhile, Khun Natruedee was previously in charge of governance, compliance, risk management and communication and has now shifted her role to focus on the strategy and business development.

In short, 2019 has been a year of major developments for PTTEP throughout the past 35 years. After the establishment, the company has been through roughly 4 major stages. The period of incubation and joint ventures spanned over a period of about 15 years, followed by the time when we pursued our business endeavors overseas. Then 5 years ago, we have been faced with global changes happening very rapidly and disruptive challenges, oil price volatility resulting from the global perception in terms of demand and supply mechanism. The technological disruption is said to be the main determinant of lower energy consumption globally. However, the technological advancement did have its positive impact, as it has enabled exploration activities to identify new resources more effectively.

We can say that we have made achievements in almost every aspect of the business in 2019. Production-wise, we have recorded the highest sales volume of 351,000 barrels of oil equivalent per day despite the uncertain situation at the end of 2018. Also, we successfully acquired contracts for Bongkot and Erawan in 2018, a big change for PTTEP indeed. Nonetheless, many people have been skeptical of our competency to operate given the rather low bid price. But at the end, this is considered a high risk, high return business. And like many other businesses, growing and maintaining profitability is challenging, urging ourselves to adapt in order to sustain in the new era. With that, we have exercised many endeavors to conserve the environment and minimize greenhouse gas emissions.

With that being said, it is not that we have recently been serious on this matter, we have actually been working on this since 2012, taking it as a baseline and set the target that we must reduce greenhouse gas emissions by 25% by the year 2030. In this regard, our goal is quite aggressive. Furthermore, this environmental matter has now been incorporated into the government's policy already. All of these changes are key catalysts forcing us to be alert, starting from the acquisition of the expiring concessions, followed by the Murphy deal, which perfectly complements our existing assets in Sarawak. We have acquired a total of 5 fields from Murphy, whereby 2 of which are producing assets. One is in the development phase, and the other 2 are in exploration phase.

Moreover, we also acquired additional 2 exploration blocks on the Malaysian Peninsula. We have acquired additional interest in Sinphuhorm Project as we would like to gain more control in terms of development, and we positioned this project as a flagship asset for electricity generation in the northeast of Thailand. At the moment, the northeast of Thailand mostly resorts to the water from Laos to generate electricity, which can be quite uncertain. Therefore, with Sinphuhorm, we can be assured of energy security to a certain extent, which is part of PTTEP's original mission of operating this business from the beginning.

Then we have officially acquired Partex in November 2019, and the transition plan is now in progress. Essentially, we are interested in the assets they have in the UAE and Oman. In the portfolio, they also have assets at Kazakhstan, Angola and Brazil as well. Apart from that, the final investment decision was made for the Mozambique Area 1 project. We are working on the project finance to reduce financial costs with minor changes in the plan, though the first cargo time line remains unchanged, while Algeria Hassi Bir Rekaiz has been executed as planned. All in all, these assets have joined force in increasing the production capacity for PTTEP from 300,000 barrels of oil equivalent per day to 350,000 barrels of oil equivalent per day in 2019, raising our reserve life from 5 years to 7.5 years. Over the next 5 years, with all of the assets in the portfolio, we are of the view that average sales shall increase by 6% annually throughout the 5-year period.

Speaking of the exploration activities, which form the base for our business in 2019, we have come across Lang Lebah, the world's seventh largest discovery of gas field in 2019. There are several development stages in taking the field to first production. We have now completed moving towards the conceptual development plan. We are soon to be the largest gas supplier in Thailand and are the largest production volume in Myanmar, and we own the third largest resource size in Malaysia. Performance-wise, the net income has increased by 40% year-on-year from USD 1.120 billion in 2018 to USD 1.569 billion in 2019. We are proud of this achievement as the oil price scenario in the previous year was not that supportive. We have taken a number of efforts to contain our unit costs, increase production volume and maintain profit margins. This achievement is only slightly lower than our peak profitability performance of about USD 1.800 billion, and we will strive to take consistent effort in maintaining this.

Nevertheless, 2020 is going to be a challenging year as we are well aware of the fact that gas price will be lower than 2019. Despite that, we believe that the sales volume could increase by about 8% this year to roughly 390,000 barrels of oil equivalent per day. It is highly necessary that we must be very cautious when taking actions or making decisions this year.

Meanwhile, we have been able to maintain the safety performance above the industry average, while our governance, risk management and compliance have been well recognized by many institutions. Despite our intention to make this year great again, we have to admit that the situation might not be as supportive as the previous year.

It is quite unlikely, as agreed upon by many institutes, that our industry is going to die out anytime soon since there are no tangible observations regarding prevalence of the renewable or solar energy. These alternatives are certainly going to be introduced, but they are not substantial enough to play key roles. Going forward, our portfolio will be 70% gas and 30% liquid, the proportion that we will maintain, while intensive focus will be on gas as it offers a certain level of stability and also fits in with the global trend that views gas as clean and reliable energy source.

Our production basis will remain in 5 countries: Thailand, Myanmar, Malaysia, the UAE and Oman. For instance, the exploration drilling in Abu Dhabi will commence in the third quarter 2020 while the exploration drilling of MD-7 Project in Myanmar is going to commence in the first quarter of 2020, a joint effort between PTTEP and Total. Production-wise, we can expect the first batch of gas from Block H Malaysia in the second half of 2020, while FLNG is now ready and the well drilling is now in progress. For SK410B, or Lang Lebah, we have anticipated the initial capacity of approximately 300 million to 500 million standard cubic feet per day.

Last but not least, we can expect the first cargo for the Mozambique Area 1 Project in 2024, and we are more confident once Total has joined in as the lead operator of this project. Over the next 5 years, our business outlook is very clear, and our key focus in 2020 will be on exploration activities as we intend to ensure energy security beyond the 5-year period. We believe that the acquired reserves or production capacity is less likely to yield as good of the returns as compared to reserves that we have explored by ourselves. Hence, exploration is considered an activity that involves high risks but also high returns.

Looking further, when oil and gas are beginning to lose their significance, we will then need to look for new energy alternatives and new business opportunities. Since PTTEP is strategically positioned as the upstream business for the whole group, we will continue to serve as the upstream flagship.

In the middle of 2019, we have established a new company, ARV. The company has started to generate revenue, and there are plans to develop different types of autonomous unmanned vehicles. In the near future, we'll be collaborating with a large satellite company to offer solutions in the farming industry. Meanwhile, ARV's technology will be utilized in the exploration activities, and we expect positive synergistic benefits from this collaboration.

To summarize, 2019 has been a successful year for PTTEP in terms of production, exploration and acquisition of new projects, strictly following the strategic direction we have aspired. In 2020, the emphasis will be on execution, and we will only focus on endeavors that promise timely returns. More importantly, we aim to ensure stability over the medium-term and long-term periods for PTTEP.

--------------------------------------------------------------------------------

Natruedee Khositaphai, PTT Exploration and Production Public Company Limited - EVP of Strategy & Business Development Group [3]

--------------------------------------------------------------------------------

I believe you're all familiar with the sustainability development framework that has been shared earlier on. Previously, our sustainability measures were executed in an outside-in approach following the standard guidelines of the United Nations and the DJSI, which we are still observing very actively. However, we have shifted to an inside-out focus from we to world with the intention to upgrade the business under the sustainability mindset, meanwhile transferring values to all stakeholders and the society as a whole. In doing so, we are still adhering to the 3 main pillars: HPO, GRC and SVC, while, at the same time, aligning with our new vision, Energy Partner of Choice. The 3 pillars under the SD framework primarily features 3 notions: be good, be smart and be responsible.

The high-performance organization pillar, or HPO, involves operating the business under the EXPAND and EXECUTE strategies with key emphasis on execution, operational excellence, capability development, innovation and technology and safety. With regards to governance, risk management and compliance, GRC, our principle is to upgrade the business with transparency, righteousness and fairness with strict compliance with laws and regulations while adhering to the principle of governance and risk management. The key idea of a stakeholder value creation as we see is to be responsible for what we do, whereby our priority is to reduce greenhouse gas emission, make contribution for the society and conserve the environment. The 3 pillars will serve as a principal framework to develop our strategic direction as we as go forward.

Since our standpoint is to focus on execution, it is critically important to ensure smooth transition and business continuity in terms of gas production. For instance, we need to deliver our commitment to the government in producing gas from Bongkot and Erawan by the year 2022 and 2023. Meanwhile, we need to deliver sales volume and first gas from newly acquired assets in Malaysia from Murphy, as committed in our plan. With the incorporation of Block H, the production capacity will be enhanced in the middle of 2020. For the newly acquired assets from Partex, there are details regarding the involved joint ventures that we need to properly manage.

In terms of existing assets, we need to make sure that they are appropriately optimized. Despite being the mature assets, some of them still have the potential to yield good returns. For instance, S1 had hit record-high production at 40,000 BPD in the previous year together with the adoption of new production technique, i.e. enhanced oil recovery, to extract every drop of oil including other legacy assets in the Gulf of Thailand. According to the advanced technology, we are now able to extract oil from underground with lower costs than before. For projects under development, Mozambique Area 1 and Algeria HBR projects have already achieved the FID in 2019.

Speaking of exploration, the acquisition of new assets does help increasing our production value, but, more importantly, we need to ensure that these reserves have a promising potential for growth and sustainability, and that is enabled through exploration activities. Doing so involves high risks and also high returns. The exploration drilling cost is lower compared to the acquired reserves. With that, our plan is to drill 18 exploration wells in 2020, mainly in Malaysia as well as in Myanmar MD-7 project.

With our focus on execution, when any potential opportunities present themselves, we need to be extremely sure that they fit in with the overall picture and add value to our portfolio prior to making decisions to acquire. There are 3 major themes under the stakeholder value creation, SVC, the first of which is the greenhouse gas reduction aiming to reduce the emission of greenhouse gases and utilize resources effectively. Smart logistics feature-wise use of oil and other resources related to transportation more efficiently, together with leakage prevention and reforestation. Our target is to reduce greenhouse gas by 25% by the year 2030 using 2012 as the base year.

As for the circular model for E&P, previously, things that are no longer used were discarded or thrown away, which might cause other serious problems. Therefore, this theme intends to encourage reusing objects for other purposes. For instance, top-side and wellhead platforms. With this concept in mind, these platforms are now being designed in a standardized manner so that they can be reused in the future. For drill cuttings extracted from exploration activities, previously, they were sent back to the shore to burn. Now we mix them with asphalt and use as materials for road construction. The target is to reuse 50% of the structures by the year 2030 and produce 0 waste through the landfill.

The last theme under SVC is ocean for life, whereby the objective is to improve biodiversity and local wealth, especially for marine creatures, to be more diverse and complete the food value chains. Now we have CSR projects that support on crab and turtle hatchery, and we are looking to add whale sharks into the project, as whale sharks are quite reflective of the fertility of the ocean since they are at the topmost of the marine food chain. Furthermore, we aim for 0 spill, which we are already doing, as well as the development of the baseline for microplastic. Nowadays, excessive use of plastic has been an ongoing issue worldwide, and we talk a lot about this. However, we lack a certain benchmark to determine the extent of the excess, so we are going to sign an MOU with Kasetsart University to work on this matter to develop a plan and set the target for plastic use reduction.

This matter is quite self-explanatory. We employ 0 tolerance for corruption and noncompliance with appropriate risk management and control. In this regard, PTTEP does have a process in place to ensure that the GRC is truly effective, enabled through the policy that's applicable to everyone. We have the governing bodies to monitor this issue ranging from the Board of Directors to subcommittees, Risk Management Committee, Audit Committee and Corporate Governance Committee. We create an awareness among staff members through the policy, communication and training. As a monitoring measure, we perform control and audit activities via the 3 lines of defense and control self-assessment.

Last but not least, in case of noncompliance, whistleblowers may also submit the case via the CG hotline. PTTEP has been well recognized of the excellence in this matter through awards and recognitions, the NACC Integrity Award from National Anticorruption Commission and the 2019 Role Model Organization Award on Human Rights from the Ministry of Justice.

In conclusion, our intention is to ensure growth and sustainability for the company with the business execution plan and proper control while, at the same time, transferring values to the stakeholders and the society in general.

--------------------------------------------------------------------------------

Sumrid Sumneing, PTT Exploration and Production Public Company Limited - EVP of Finance & Accounting Group [4]

--------------------------------------------------------------------------------

The net income in 2019 was recorded at USD 1.569 billion, increasing by 40% year-on-year, enabled through the acquisition of Murphy assets in July, Partex deal in November and full year recognition from the acquisition of additional 22% in Bongkot, which was completed in the middle of 2018. Moreover, there was a divestment of Montara asset in 2018. Hence, the relevant expense was no longer incurred in 2019.

In 2019, one of another key factor that has impact to company's performance is the appreciation of the Thai baht from THB 32.45 per U.S. dollar to THB 30.15 per U.S. dollar, which resulting in a decrease of income taxes expenses related to changes in foreign exchange rate. In the meantime, the average oil price in 2019 was USD 63.5 per barrel, while it was USD 69 per barrel in 2018.

There are a few reasons for the increase in profitability in 2019, the first one obviously increase in sales volume by 15% from 306,000 barrels of oil equivalent per day to 350,000 barrels of oil equivalent per day, mainly from the acquisition of 22% interest in Bongkot Project, Malaysia asset and Partex. With the drop in oil price, the average selling price of liquid decreased from USD 67.4 per barrel to USD 61.18 per barrel. However, gas price remained strong at USD 6.92 per MMBtu as there was some lagging time effect in the gas price adjustment. Thus, the weighted average selling price was slightly increased year-on-year.

On the cost side, we have been able to maintain the unit cost at USD 31.71 per barrel. Even the cash cost has increased slightly. Noncash cost has dropped, mainly from no high depreciation, depletion and amortization from Montara divestment. The beginning cash in early 2019 stood at approximately USD 4 billion. The total amount of cash outflow in 2019 was approximately USD 6.2 billion, mainly from the acquisition of Murphy and Partex assets that costs about USD 2.8 billion. However, with the operating cash flows and cash inflow from bonds and long-term borrowing of USD 5.2 billion, the ending cash remained at USD 3 billion, which was enough to support our operations. At the present day, the amount of cash on hand is about USD 3.2 billion.

With regards to the capital structure, the assets increased from USD 19.484 billion to USD 22.202 billion year-on-year, mainly from the acquisition of Murphy and Partex assets. Other liabilities increased due to the decommissioning of Murphy and Partex, while the interest-bearing debt also increased by about USD 1.4 billion from new long-term loan of USD 600 million, new bond issuance of USD 650 million and Thai Baht bond issuance of USD 480 billion with some loan repayment. The equity was slightly dropped from USD 12.005 billion in 2018 to USD 11.841 billion in 2019 despite the increase in net profit of USD 1.569 billion because there was a dividend payment amounted to about USD 700 million, and there was a settlement of perpetual bond amounting to USD 1 billion. The debt-to-equity ratio slightly increased from 0.16x to 0.29x. The weighted average cost of debt decreased year-on-year from 5.32% to 4.41% in 2019 and is currently around 3.9% as a result of our liability management.

Over the next 5 years, we projected compounding annual growth rate of sales volume for 5-year period of around 6% from 351,000 barrels of oil equivalent per day in 2019 to 470,000 barrels of oil equivalent per day in 2024. This was driven the achievement of our acquired projects. For instance, Murphy assets and Partex will yield full year impact in 2020, resulting in higher volume than 2019. The Mozambique Area 1 project will start contributing volume from 2024 onwards with Bongkot and Erawan adding up in 2022 and 2023, respectively.

In terms of investment over the next 5 years, OpEx and CapEx is USD 24.690 billion inclusive of such key projects as Bongkot, Erawan, Murphy, Partex and Mozambique Area 1. The dividend payment increased from THB 5 to THB 6 per share in 2019. However, when it comes to dividend payment, we also consider both the absolute number and the payout ratio, which is about 50%, while the dividend yield varies between 3% to 5%. Also, the net income in 2019 was higher than that of 2018. Hence, the dividend payment was agreed at THB 6 per share.

With regards to guidance, the average sales volume in first quarter 2020 is expected to be around 394,000 barrels of oil equivalent per day, about the same as that for the fourth quarter of 2019. For the full year of 2020, we expected slight drops in sales volume to 391,000 barrels of oil equivalent per day due to the upcoming annual maintenance shutdown of Bongkot, Contract 4 and Sotika projects during the year.

The average gas price in the fourth quarter 2019 was USD 6.9 per MMBtu, which is likely to remain unchanged in the first quarter of 2020. In this regard, the impact from the International Maritime Organization's regulations on low sulfur fuel oil will start to take effect from the second quarter 2020 onwards, the potential factor causing the average gas price throughout the whole year to decrease to USD 6.4 per MMBtu. Lastly, the unit cost should remain pretty much unchanged at USD 32 per barrel of oil equivalent while the EBITDA margins should have been maintained in the range of 70% to 75%.