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Bangchak Petroleum

Diversifying into E&P

Bangchak Petroleum Plc (BCP)

Investment thesis

The key messages from the analyst meeting reaffirmed our view about BCP's short-term earnings outlook. However, we are concerned about its plans to increase investment exposure to E&P. Furthermore, PTT's share sell-down plan constitutes an overhanging issue. Also, although we think the market has already priced in possible downside risk to earnings from soon-to-be-announced energy policy reform (particularly ex-refinery price cuts), the theme limits the stock's scope for price upside.

BCP currently trades at an FY14 PER of 9.4x—discounts to both its long-term average of 10.0x and to the regional mean of 15.9x. As such, share price downside risk appears limited.

Strong core earnings growth expected for 3Q14

BCP's 3Q14 core earnings are expected to increase both YoY and QoQ, driven by a greater crude run, a fatter market GRM and a bigger profit at the solar power unit. The firm's crude run is expected to rise by 4% YoY and 116% QoQ to 105kbd following a major turnaround in 2Q14. As such, marketing sales volume is also expected to rise.

In addition, BCP's market GRM should fatten both YoY and QoQ, driven by lower fuel oil production. The fuel oil yield is expected to normalize at about 13% in 3Q14, down from 23% in 2Q13 and 22% in 2Q14. The fuel oil yield was abnormally high in 2Q13 and 2Q14, due to a sub-optimal operation as a result of plant shutdowns. Moreover, the earnings contribution from the solar power business is expected to increase both YoY and QoQ, led by a full operational quarter for solar farm phase 3.

Investment in E&P business …risky business diversification?

BCP recently announced that it will launch a tender offer for all the remaining shares in Nido Petroleum Ltd (Nido) that it does not yet own. It reported the purchase of 19.66% of Nido's shares on July 30 (see our August 1 BCP report). Management guides that BCP could acquire not less than 90% of the stock. The acquisition is part of the firm's plan to diversify upstream with an aim of being an offensive operator. We regard that plan negatively, as E&P is an inherently risky and capital-intensive business.

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