Acquisitions fit with PTTEP’s coming home strategy. Contribution to PTTEP: +18% for production volume, +27% for 2P reserves, and 70-75% EBITDA margin. Upgrade to OUTPERFORM, raise TP to Bt150/sh (from Bt115/sh)

Acquisitions fit with PTTEP’s coming home strategy

PTTEP has signed a Share Sale and Purchase Agreement (SSPA) to acquire 100% stake of Murphy Oil Corporation’s business in Malaysia, which has two subsidiaries of Murphy Sarawak and Murphy Sabah. These two companies currently hold five projects; two under production, one under development, and two under exploration with total proved and probable reserves (2P) of approximately 274m boe. Total sales volume in 2018 was 48k boed, 62% of which is liquid product. Total transaction is US$2,127m, implying US$7.8 EV/boe, which is in the low range of past five-year transactions (ranging US$6-18/boe) in Southeast Asia. Transaction is expected to complete by 1H19. On the separated announcement, PTTEP was awarded for exploration and production rights of two blocks, PM407 and PM415, located in offshore Peninsular Malaysia, with interest at 55% and 70% respectively.

Contribution to PTTEP: +18% for production volume, +27% for 2P reserves, and 70-75% EBITDA margin

PTTEP expects these assets to increase sales volume by 18% (on five-year average) from 318k boed in 2019. They will increase 2P reserves by 27% from 1,028m boe at end 2018 to 1,302m boed. Post acquisitions, 73% of PTTEP’s 2P reserves is gas and another 27% is liquid (75% gas and 25% liquid at end 2018). PTTEP expects EBITDA margin at 70-75%, which is the same range as its current EBITDA margin. Note that the sales volume and 2P reserves are not including Bongkot and Erawan projects that PTTEP won the bids. We estimate these projects to add 137m boe, or 9% to our estimate of PTTEP’s proved reserves (1P) at end 2019, which consist of 677m boe at end 2018, 145m boe from Mozambique, 430m boe from Bongkot, 100m boe from Erawan (60% stake, assuming 1/3 of committed sales volume), and 50m boe from Southwest Vietnam and Algeria HBR projects. The reserve lives will increase from 5.5 years at end 2018 to 13 years.

Upgrade to OUTPERFORM, raise TP to Bt150/sh (from Bt115/sh), deserve to be re-rated

We are optimistic on these acquisitions and expect PTTEP’s share prices to be rerated given a substantial increase in 1P reserves. We upgrade the stock to OUTPERFORM and raise TP to Bt150/sh, pegged to 15.5x FY19F PE, or +0.5 SD of 12-year historical mean. The PE multiple will drop to 12.7x in 2020F as PTTEP starts first gas production at the Sabah H project in 2020.