Thailand's PTT scouts for cheap oil assets

PTT's chief on rethinking oil strategies

Thailand's largest state-owned oil and gas producer PTT Public Company is scouting for acquisitions as valuations have cheapened, according to its chief executive.

Tevin Vongvanich, who is also the president of PTT, told CNBC's "Managing Asia" that now was a good time to acquire companies as the cash balance of the company, and its subsidiaries, are healthy at the moment.

"The prices of upstream assets have come down quite a lot. We are thinking of entering into the unconventional, the shale oil business in the U.S. or elsewhere," he said.

"We feel that that is one area, well actually one of the main reasons for this drop in oil prices is that the development of new technology, the fracking technology, that allowed us to recover this oil. So we need to get into that kind of business for the long term."

He reckons oil prices could reach $50 a barrel eventually to keep pace with growing consumption of cheap oil, but the timing remains uncertain. "We have seen, in Thailand, in December, consumption of gasoline in itself increase by 10 percent in a month," he said. "That shows the consumer may be less aware or cautious of spending on energy, because it is so cheap."

Tevin Vongvanich, president and CEO of PTT Public Company
Tevin Vongvanich, president and CEO of PTT Public Company

Vongvanich had hints of what he was signing up for when he took over the helms at PTT in 2015. An industry veteran with over 25 years of experience, he had seen the collapse in oil in 2008, when prices fell from "$150 per barrel to about 30-something dollar."

Starting in 2014, energy prices began to retreat from heady heights once more. A further decline eventually saw the price of crude oil fall below $40 a barrel by end of 2015, wreaking havoc with the finances of energy producers.

Data showed while large, publicly traded companies such as ExxonMobil, BP and Chevron may have the necessary resources to weather the tough times, dozens of smaller firms had already filed for bankruptcy by the end of last year. More companies are expected to join them.

PTT wasn't immune to the turmoil either. The company's sales and services income for the year ended December 31, 2015 was at 2.03 trillion baht ($57.19 billion), down 22 percent from a year earlier according to financial statements. The company's full year operating profit was down 42 percent from 2014 at 79.6 billion baht.

"Last year, our performance was affected heavily by the impairment of some of our assets in the upstream, exploration production, as well as in the coal business," Vongvanich said.

In the meantime, the company is focusing on efforts to keep PTT afloat until prices go back up again. These include cutting cost, increasing productivity and investing only in necessary infrastructure. Vongvanich is confident of managing the performances of most of PTT's oil business, except upstream exploration production. He said it remains a challenge due to the drastic drop in oil that isn't reflected on the cost side. Upstream refers to exploration and production of oil.

He said, "Obviously we have done a lot of cost management, increasing productivity, but the scale is still not matching with the price reduction, so that is still a challenge on the upstream side."

His assessment was echoed by ratings agency Moody's, which put the ratings of seven south and south east Asian energy companies, including PTT, on review for downgrades in January.

As part of its ongoing assessment of energy markets, Moody's explained it sharply reduced its oil price assumptions in January in light of continuing oversupply in the global oil markets and demand growth that remains tepid.

Moody's said it assumed Brent crude to be at $33 a barrel for 2016 before climbing up to $43 in 2018. The stress level was set at $25 a barrel.

"Lower oil prices will further weaken cash flows for [exploration and production] companies and the upstream portion of integrated oil and gas companies," Moody's wrote in a press release. "This will cause further deterioration in financial ratios, including deeper negative free cash flow."

However the ratings agency said in a separate report that PTT remains more resilient in this low oil price environment because of its integrated business profile with significant mid and downstream operations and its natural gas business.

"Stable earnings from these other businesses along the oil and gas value chain will partially offset the lower upstream earnings," said Moody's.