As oil prices surge, here's a potential beneficiary.

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Singapore Depository Receipts

By Beansprout • 28 Sep 2023 • 0 min read

Oil prices recently rose to their highest level in more than a year. As oil price nears $100 per barrel, we find out which companies could potentially benefit.

oil price surge sep 2023

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What happened?

Some of you may have caught the recent headlines that oil prices climbed above US$95 per barrel for the first time this year.

The spike in oil price came through after Saudi Arabia and Russia, two of the largest oil producers globally, announced that they would be extending oil supply cuts until the end of the year.

In addition, the global economy has been more resilient than expected, with economic growth in the US accelerating to 2.1% in the second quarter of 2023. 

oil price hit 1-year high sep 2023

With the higher oil prices, investors have been asking if there if there are any companies that could potentially benefit from the higher oil prices. 

We decided to take a closer look at PTT Exploration & Production company, or PTTEP, one of the largest oil and gas companies in Southeast Asia. 

What you need to know about PTTEP 

PTTEP is Thailand’s largest oil and gas exploration and production company, with 70% of its assets in Thailand and other parts of Southeast Asia. 

It is the upstream arm of Petroleum Authority of Thailand (PTT), which holds 64% of PTTEP. 

This means that PTTEP is involved in the exploration and production of natural gas and crude oil. 

#1 – PTTEP’s revenue is leveraged to oil and gas prices

PTTEP’s average selling price fell to US$48 per barrel of oil equivalent (BOE) in the first half of 2023 from US$53 per BOE in 2022. 

The decline in the first half of 2023 was driven by lower oil prices, as the average price of brent oil declined to about US$80 per barrel from US$100 per barrel in 2022. 

Higher oil prices may help to reverse the slide and lead to higher average selling prices for the crude oil produced by PTTEP.

With PTTEP’s average unit cost consistently below US$30 per BOE since 2021, higher oil prices could then translate to higher profits for the company. 

In fact, we have seen PTTEP’s average unit cost consistently declining in the past few years. From above US$30 per BOE in 2020, its unit cost has declined to US$28 per BOE in 2022.

In the long term, PTTEP targets to bring its unit cost down further to below US$25/BOE.

pttep unit cost vs average selling price
Source: Company data

 

#2 – PTTEP is positioned to benefit from higher oil prices

PTTEP has earmarked US$29 billion in E&P budget to grow its production volume in the coming years. 

As a result, the company expects to grow its production at a compounded annual growth rate (CAGR) of 6.3% between 2022 and 2027. 

The expected growth in production volume is further supported by its ample reserves of 10.7 years as of December 2022, of which proved reserves would amount to 6.8 years. 

pttep oil production forecast
Source: Company data

 

#3 – PTTEP offers an attractive dividend yield 

PTTEP has a dividend policy to pay out at least 30% of its net profit, and has paid out dividends representing 40% to 71% of its profit from normal operations since 2018. 

In 2022, the company paid out a total dividend of THB 9.25, including an interim dividend per share of THB 4.25 and a final dividend per share of THB 5.00. Together, this would represent 40% of its profit from normal operations. 

Based on its share price of THB 165 as of 21 September 2023, this would translate to a dividend yield of 5.6%.

Despite the decline in average oil price in the first half of 2023 which led to lower profits compared to the previous year, PTTEP maintained its interim dividend of THB 4.25 per share. 

The dividend payout is further supported by PTTEP’s strong balance sheet position, with a net cash position as of June 2023. 

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What are the key risks of PTTEP?

#1 – Gas contracts may be less sensitive to oil prices

While the average selling price of oil produced by PTTEP is closely tied to oil prices, some of its gas contracts may not be as sensitive to changes in oil prices. 

For example, the price that PTTEP will be able to sell its gas in some new gas contracts will be lower than under a previous formula for every level of reference oil price. 

In addition, the new gas price will be less sensitive to oil price movements, with a US$5 per barrel change in oil prices expected to change the gas price under the new formula to just 1.7%. 

As a result, the average selling price of the gas it produces could still decline even with the elevated oil prices. 

#2 – Oil prices are cyclical and may decline with an economic slowdown

While the current economic environment may not be as bad as feared, any potential sharp economic slowdown could lead to a decline in oil prices. 

In particular, there are still significant risks relating to China’s economic recovery with the property sector remaining in doldrums. 

A significant decline in oil prices may lead to lower average selling price for PTTEP and potentially weaker than expected profits.  

What would Beansprout do? 

PTT Exploration and Production (PTTEP) Singapore Depository Receipts were recently launched on the Singapore Exchange, and trades under the stock code SGX: TPED.

This means that you will be able to gain access to PTTEP in the same way that you are buying and selling a Singapore stock through a trading platform which offers access to the Singapore Exchange. 

With the listing of the PTTEP SDR, investors now have another oil and gas name to consider apart from familiar names such as Seatrium and Dyna-Mac

As an oil and gas exploration and production company, PTTEP is directly leveraged to oil prices, and may benefit should oil prices continue to rise further from current levels. 

In addition, PTTEP is expected to grow its production volumes in the coming years, backed by its healthy reserves. The stock also offers an attractive historical dividend yield of 5.7%. 

If you are interested to learn more about PTTEP, read our in-depth write-up about the company here. 

To find out more about Singapore Depository Receipts, read our introduction to the product here.

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