A beginner's guide to the Thai listed energy sector, including Banpu, PTT, PTTEP, Siam Cement, Thai Oil, Ratch and Glow

For any investors who are new to the Thai energy sector, here’s a quick and dirty guide to the structure of the sector and which bits of it you can access through the Thai stock market.

The first observation is that the Stock Exchange of Thailand’s (SET) own sector categorizations are not that helpful. ‘Energy & Utilities’ includes a few non-energy companies – and petrochemical companies are found in several categories. For the purposes of this analysis, I will use AWR Lloyd’s own concept of the ‘energy sector’: coal, upstream oil and gas, refining and petrochemicals, midstream and downstream gas and petroleum, power and renewables.    

Thai energy consumption (based on 2009 figures) is approximately 1.7 million barrels of oil equivalent per day (‘mboed’). Using rounded numbers, about 0.7 mboed is petroleum product consumption and another 0.7 mboed is natural gas consumption. Towards 0.3 mboed is in the form of coal consumption, including domestically-mined lignite for the Electricity Generating Authority of Thailand’s (EGAT) mine-mouth Mae Moh power plant in Lampang and coal imports (mainly from Indonesia) for independent coal-fired power plants and industry. Only a very small amount (around 2%) is renewable energy consumption, the vast majority of which is hydro electricity consumption.

Petroleum product consumption includes about 0.1 mboed of LPG consumption, over two-thirds of which was derived from natural gas. Refinery product output was just over 0.8 mboed in 2009, of which around 0.2 mboed was exported. There are six main refineries in Thailand and one condensate splitter with a combined output capacity of around 1.2 mboed.

Crude oil and condensate supply to Thailand is 1 mboed, with 0.8 mboed imported (of which 0.6 from the Middle East) and 0.2 mboed from indigenous sources. Of the Thailand-sourced crude and condensate, just over a third comes from the Chevron group, with towards a third from state-controlled PTTEP (BAK:PTTEP) and a third from other companies.

In terms of natural gas, 0.5 mboed is from domestic sources, approximately one-third from Chevron, one-third from PTTEP and one-third from other companies. Another 0.15 mboed or so of natural gas is imported from Myanmar, from the Yetagun and Yadana gas fields (in which PTTEP has 19% and 26% stakes respectively). While around half of the gas goes via state-controlled giant PTT (BAK:PTT) pipelines direct to power plants, another half goes through PTT’s gas separation plants. From the separation plants much of the treated gas also goes to power stations, while some is used in industry (including the petrochemicals industry) and for vehicles. About 0.45 mboed of natural gas is used in total by the power industry: about half by EGAT and half by IPP and SPP companies.

So which bits of the sector can you access through the Thai stock market? And what else does the SET-listed ‘energy sector’ have to offer? Using AWR Lloyd’s definition, the Thai-listed energy sector had a market capitalization equivalent to around $70 billion at the end of 2009 accounting for towards 40% of the total market value of the SET as a whole. PTT (51% government-owned) is, of course, the veritable corporate ‘octopus’ sitting across the entire sector with tentacles in every business. For every dollar you invest in the SET listed energy sector (assuming you invest on a weighted basis) around 70 cents is directly or indirectly a bet on PTT’s capabilities and strategy.

Based on AWR Lloyd’s sum-of-parts value structure analysis of the main 25 energy companies listed on the SET, this is what the Thai-listed energy sector has to offer (numbers are indicative only and based on market capitalizations at end 2009):

i)               Coal ($4.5 billion): While the SET does offer exposure to the coal sector, virtually none of it relates to Thai coal output given the failure to privatize EGAT a few years ago and the dwindling production from privately-owned coal mines in Thailand (and putting aside the coal import and distribution sector which can be accessed via TTA, Unique Mining and Asia Green Energy). The main ‘coalmining’ sector exposure is through Banpu (BAK:BANPU) – and to a lesser extent, Lanna Resources and PTT. Banpu has come from ‘nowhere’ (Bt 3 billion market capitalization in 2000) to being one of the Thai energy sector’s blue chips in recent years with a market capitalization of Bt 156 billion (equivalent to around $4.8 billion) at the end of 2009, with a ten year average Total Shareholder Return (TSR) of about 44% (including 162% in 2009). While the company had some Thai coal output, these mines are now closed and most of this value creation has come from investment in the Indonesian coal sector. Banpu is now the largest foreign player in the Indonesian coal sector with around 23 Mtpa of export-grade thermal coal. Banpu is also the only foreign coal company with majority-owned coal operations in China.  We attribute around $4 billion of equity value to Banpu’s coal business at the end of 2009 out of its market capitalization of $4.8 billion at that point (the rest being power, see below). In 2009, PTT made its first foray into the coal sector through its acquisition of 60% of Straits Bulk & Industrial which owns 47% of Straits Asia Resources (‘SAR’), listed on the Singapore stock exchange. SAR has 10 Mtpa of coal output in Indonesia. PTT has since announced that it will invest a further $1.6 billion in the coal sector over the next decade. We attribute just over $0.3 billion of value to PTT’s current coal business. Lanna Resources, which owns two coal mines in Indonesia with equity output of around 2 Mtpa has a market capitalization of just under $0.2 billion, but also has an ethanol business accounting for towards half its value.

ii)             E&P ($25 billion): Exposure to the upstream oil and gas sector is primarily and directly through PTTEP ($15 billion market capitalization) but also indirectly through PTT which controls 66% of PTTEP. According to AWR Lloyd’s sum-of-parts analysis, PTTEP accounts for 45% of PTT’s market value. In 2009, PTTEP had equity output of 260 kboed of which 70% was natural gas and 30% crude oil and condensate. Sales were 235 kboed, of which 200 kboed from Thai fields (Arthit, North Arthit, Bongkot, Pailin, MTJDA…), 25 kboed from South East Asia (Myanmar and Vietnam) and 11 kboed from the Middle East. PTTEP’s ten year average TSR has been a very respectable 24%. Last year, the 43% TSR was lower than for the SET as a whole, however. Lower average oil prices and an accident at the Montara project (development well drilling leakage and a fire at the contractor’s drill rig) both impacted the company’s share price performance. The natural gas price at which PTTEP sells to PTT is regulated and is slightly lower than international prices but is still linked to international oil price movements. The biggest driver of PTTEP’s value growth going forward will be international organic expansion, in particular the M9 project in Myanmar, the Montara project in Australia and the Vietnam 16-1 project.

iii)            Refining ($8 billion): While it is difficult to disentangle the refining sector from petrochemicals given that a number of companies have integrated operations, based on AWR Lloyd’s sum-of-parts analysis we estimate the market value of this segment, with a combined refining capacity of 1.2 mboed, at around $8 billion. This value, involves a significant amount of doubling up though given that PTT holds significant shareholdings in nearly all the refiners: Thai Oil, PTTAR, IRPC, Bangchak and SPRC (the latter scheduled for an IPO in 2010). So, an investor can gain direct exposure to the refiners at a value of around $5.5 billion or indirectly through PTT at a value equivalent to around $2.4 billion. Esso (65% owned by Exxon) and Rayong Purifier are the only two refiners with no PTT shareholdings. The refining sector suffered from lower gross refining margins and lower utilization in 2009 due to high stockpiles and depressed global demand. With a substantial number of refinery shutdowns and global economic recovery kicking in, we are now cautiously optimistic on the medium term outlook of the sector. As mentioned, many of the refiners have significant petchem businesses – but some also have power interests (Thai Oil and IRPC), retail stations (Bangchak, Esso, Rayong Purifier and IRPC) and other businesses (ethanol, bio-diesel, solar…).To ensure the necessary investment ($1 billion plus) to upgrade IRPC and to capture feedstock and Euro IV compliance synergies, PTT is considering orchestrating a merger between two or more of its refining and petchem companies (PTTAR and IRPC plus possibly Thai Oil and/or PTT Chemicals).

iv)            Petrochemicals ($17 billion): This is a big sector and much depends on where you draw the line in terms of sectoral definition – but the likes of PTT Chemicals, Siam Cement, Indorama and Thai Plastics offered around $10 billion or so of petchem exposure at the end of 2009. In addition, through the refiners and doubling-up through PTT (which owns 49% of PTT Chemicals, an olefins chain petchems player based on gas feedstock), investors can theoretically gain another $7 billion of petchem market exposure. The vast majority of this relates to assets in Thailand, but Indorama and Siam Cement also offer overseas exposure (the latter is planning a 3Mtpa naptha cracker, polyolefins and PVC plant in southern Vietnam, commissioning by 2014). The petchem sector was also depressed in 2009 with narrowing petchem spreads and high inventories. While the immediate outlook remains bearish, by 2012 we expect a cyclical upturn in the spreads.

v)             Midstream and downstream gas and petroleum ($9.5 billion): AWR Lloyd attributes around $9 billion of value to PTT’s gas pipeline, gas separation and distribution businesses at end 2009. This is the only significant part of PTT’s business which does not have a separate stock market listing but is very profitable in its own right based on transmission pricing which builds in fixed returns on equity of 11-16%.  PTT has five gas separation plants and a sixth one under development (delayed, see below) with throughput of around 325 kboed in 2009. PTT also has retail service stations and an oil trading business. This latter business added to the retail station businesses of the refiners and the market capitalizations of Siamgas (LPG sales) and BAFS (jet fuel sales to the airports) probably adds up to another $0.5 billion or more in downstream petroleum business market value ‘accessible’ through the Thai stock market.

vi)            Power & Renewables ($6 billion): The last major component of the Thai listed energy sector is the power generation segment, which AWR Lloyd attributes a $6 billion market value to. The main listed companies in this segment are Ratch, Glow, EGCO and Banpu plus a few smaller players. Ratch (BAK:RATCH - 45% owned by EGAT and 15% by Banpu) currently has equity power capacity of 4.4 GW, focused on gas-fired, with about 1.1 GW of growth projects under development in Laos (0.7GW lignite-fired and 0.4GW hydro). Glow is already a more diversified player with 1.8 GW in equity capacity (mixed fuels), 69% owned by the Suez group – and with 0.9GW in new capacity under development. EGCO (25% EGAT, 22% One Energy) has 4.2GW of equity capacity, of which 3.7GW in Thailand, 0.3GW in Laos (hydro) and 0.2GW in the Philippines (diesel and coal-fired). All three power companies are talking of imminent acquisitions abroad in South East Asia. While these power companies offered about $4.5 billion in market value at the end of 2009, Banpu also had power interests worth $0.8 billion relating to Thai assets and just over $0.1 billion relating to its China power business. To this should also be added the power business interests of PTT and the refiners.

The Thai energy sector is relatively small by global standards and has limited growth potential compared with most other Asian countries. Last year also highlighted the regulatory risks that Thai energy players face at home. The Central Administrative Court’s rulings regarding the need for Environmental & Health Impact Assessments for new industrial projects affected PTT (sixth gas separation plant), PTT Chemicals (1 Mt ethane cracker) and PTTAR (condensate residue upgrading) in particular. This in turn affected share price and TSR performance. Siam Cement (1.7 Mt naptha cracker) and Glow (three new power projects) were also impacted in 2009. Given the regulatory risks, political instability and limited growth potential, it is not surprising that Thai energy companies are increasingly looking abroad to achieve stronger growth and shareholder returns. While some (e.g. Banpu, PTT…) have already demonstrated their aptitude for international expansion, others are as yet untested and may struggle. This is the theme to watch going forward.

Alexander Wood is a founding Partner of AWR Lloyd (wood@awrlloyd.com).