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PTT 'Biting Off More Than It Can Chew' With Cove Bid: Expert

Roshan Vaswani|Senior Producer, CNBC Asia Pacific
Wednesday, 11 Jul 2012 | 5:38 AM ET

PTT Exploration and Production, the subsidiary of PTT, may be still holding out its bid for Mozambique-focused oil and gas explorer Cove Energy, but one analyst says the acquisition is a bad idea for the Thai oil company because it would hurt its balance sheet.

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"It's (PTT) biting off more than it can chew, and I would prefer it to do smaller deals. We think already that PTT has a reasonably constrained balance sheet and that by doing this, the funding of the development puts more strain on the balance sheet," Scott Darling, Head of Oil and Gas Sector Research at Barclays, told CNBC Asia's “Cash Flow” on Wednesday.

Darling estimates that the potential Cove acquisition would raise the PTT’s gearing to around 70 percent from the current 48 percent.

On Tuesday, PTT — which has been locked in a battle with Royal Dutch Shell for Cove — extended its deadline for investors to accept its $1.9 billion offer for London-listed firm.

While Cove's board has recommended PTT's higher 240 pence offer, the Thai firm had only received acceptances accounting for 0.25 percent of Cove's shares as of last Friday.

Under U.K. takeover rules, Shell has until July 17 to come back with a higher bid, with July 25 the next deadline for Cove shareholders to accept its $1.8 billion offer.

PTT and Shell are vying for Cove’s huge gas assets off the coast of Mozambique. In May, PTT's CEO Pailin Chuchottaworn told CNBC he foresees huge demand from Asia for natural gas and that if PTT won the bid, it would provide “a very stable market for the product.”

But Darling argues that PTT could do smaller deals in South East Asia to cater to the region's rising demand for gas, without straining its finances.

"If you look at the region (South East Asia), it's running out of gas, it's increasingly becoming a net importer. So we think there are more opportunities for exploration, drilling and development in its home region as opposed to going to East Africa where Cove has its assets and doing a new project which it doesn't have any experience on."

Darling said Myanmar could present opportunities for PTT as the country begins to open up.

Political reforms in the country have prompted Western countries to ease sanctions imposed on Myanmar, leading to interest from international investors.

Chuchottaworn told CNBC in May, that Myanmar would be a focus for PTT and said the firm hopes to build energy infrastructure in the resource-rich Southeast Asian nation and eventually sell gas there.

Darling has an overweight rating on PTT Exploration and Production with a target price of 220 Thai baht. He says that if PTT goes ahead with the Cove deal, Barclays will revisit its rating on the firm.

Disclosure: Barclays holds the stock and does business with PTT.

By CNBC’s Roshan Vaswani

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