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Bangchak Petroleum

First move into upstram business BUY

Bangchak Petroleum Plc (BCP)

What's new. BCP announced its first step into the upstream oil business, spending A$22.2mn (~Bt666mn) to acquire 19.66% in Nido Petroleum Limited, an Australian-based E&P company. The company expects this investment to lift revenue and net profit and provide stable long-term cash flow. This will also fit with the company's strategy to expand into international business, diversifying risk.

Nido Petroleum Limited is an ASX-listed (ASX: NDO), Southeast Asian-focused oil and gas exploration and production company. It holds significant acreage in the highly prospective Northwest Palawan Basin in the Philippines and the Penyu and West Natuna basins in Indonesia. According to Nido's website, producing assets include the Galoc Oil Field (22.88% interest), Nido A and B Fields (22.49% interest) and Matinloc Field (22.28% interest). Nido is also developing Galoc Phase II (22.88% interest) to extend the Galoc Field, which is doing very well, and the West Linapacan A and B Oil Fields (22.28% interest). Nido's current proved reserve of is ~4.1mbbl.

Comment: Although BCP has been signaling its intention to invest upstream for some time, this announcement came sooner than expected. Also, we initially expected the company to look for local producing assets rather than abroad. At this point we are neutral on this investment given the small size of the assets and the investment (~13% of target annual investment for new business).

The acquisition cost is equivalent to an enterprise value of US$12.2/bbl of proved & probable (2P) reserve, which is slightly higher than the industry average of US$10-12/bbl.

Nido reported continuous net profit growth during 2011-13 with CAGR of >100% p.a. as production at operating assets only just started. We expect net profit to continue to rise from both current operating assets and other projects under development. The earnings contribution to BCP in the next few years will be small at We expect BCP to invest more in E&P in the near future in order to secure crude oil for its refinery in the longer term.

Still a BUY with attractive return on TP of Bt44. We remain positive on earnings outlook, which now looks more sustainable, underwritten by its solar power business. Its oil refining business should also generate better profit after the major turnaround in 2014F, followed by completion of the efficiency improvement project in 2018F. Valuation-wise, the current P/E of 8.2x in 2014F looks undemanding compared with 13.2x for regional peers. Market concern on PTT's potential divestment could be a near-term overhang for share price, although the impact on BCP's operations would be limited.

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