PTT Exploration and Production (PTTEP) has taken the first step towards the long-term financing of its acquisition of London-listed Cove Energy with the approval of its board of directors of a new share issue of about Bt98 billion ($3 billion). The issue may comprise of up to 650 million ordinary shares, which is equal to 19.6% of the existing share capital, with the final number of shares to be adjusted to meet the fundraising target.
PTTEP didn’t say specifically that the share sale will go towards the funding of Cove, a company with natural gas assets in Mozambique, but noted that it is meant to “support the company’s plan to expand its investments worldwide in order to secure new reserves of oil and natural gas to meet Thailand’s increasing demand for energy”.
“After our careful considerations of the company’s financial plan that would enable us to pursue a rapid growth to achieve a production capacity of 900,000 barrels per day by the year 2020, we have concluded that in order to further strengthen PTTEP’s financial structure, it is necessary to raise approximately Bt98 billion to support our exploration, development and production efforts,” Tevin Vongvanich, president and CEO of PTTEP, said in a statement. “At the same time, we will expand our footprint in different regions worldwide to secure additional oil and natural gas reserves to meet the increasing energy demand in Thailand.”
However, after Shell walked away from the bidding one week ago, leaving PTTEP as the sole bidder for Cove, sources have been saying that the company was expected to sell equity to raise at least part of the cash. The Thai oil and gas producer has offered £2.40 per share (all in cash) for Cove, which puts the total acquisition value at £1.22 billion ($1.9 billion).
Cove’s board of directors, which is being advised by Standard Chartered, has recommended shareholders to accept PTTEP’s offer before the July 25 deadline, and the company has also secured regulatory approval from Mozambique’s Ministry of Mineral Resources. Cove’s share price has been hovering just below the 240 pence mark since Shell dropped its bid on July 16.
A $3 billion offering is huge for Thailand, even if the country has been a relative favourite with international investors this year. With a gain of 15.6%, its stock market is the second-best performer in Asia after the Philippines and the latest equity capital markets trades have met with good demand. Still, they have been significantly smaller.
PTTEP’s planned offering will be almost three times the size of Siam Cement’s overnight sell-down in its sister company PTT Chemical in December 2010, which raised Bt33.04 billion ($1.1 billion) and ranks as Thailand’s largest equity transaction ever.
However, according to PTTEP’s statement, its controlling shareholder, state-owned PTT, will take up enough of the new share issue to maintain its stake in the company at an unchanged 65.29%. This means the amount of new shares that will be offered to institutional investors will be around $1 billion.
In response to the announcement, PTTEP’s share price dropped 4.8% yesterday to Bt157.50, leaving it with a modest 1.6% gain so far this year. The sell-off is likely to have been a reaction to the large equity issue, which will be dilutive for shareholders who do not participate in the transaction.
However, the share price had already fallen after Shell withdrew its bid for Cove, as investors worry about the cost and potentially also about the risks of doing business in Africa. Cove, whose main asset is an 8.5% participating interest in the greenfield Mozambique Rovuma Offshore Area 1 block, had no revenues last year and made a loss of approximately $4 million. The majority rights holder of the Rovuma block, which has an estimated 30 trillion to 60 trillion cubic feet of natural gas, is Andarko Petroleum.
The acquisition marks PTTEPs first foray in the natural gas market in East Africa, but the company said in a circular issued last month that the interest in the Rovuma project represents a strong fit and the acquisition is consistent with its strategy of leveraging the liquid natural gas (LNG) value chain of the PTT group in Thailand, which has strong LNG demand for the development of the country in the future.
PTTEP has built a strong international portfolio and its international assets currently account for 44% of its oil and gas reserves. The company has operations in Southeast Asia, the Middle East, North Africa, Australasia and North America, and by its own account it has a long history of working highly successfully with national and international oil companies.
The equity offering will need the approval from PTTEP’s shareholders at an extraordinary shareholders’ meeting scheduled for August 24, so the sale cannot happen before then. The final timing is likely to depend on the market conditions and with regard to the Cove funding at least, the company isn’t in any particular rush as its financial adviser it has a bridge loan in place, provided by a syndicate of banks led by its M&A adviser, UBS.
Given PTTEP’s government links, the equity issue will most likely be preceded by a formal request for proposal (RFP) to a range of banks before any mandates are handed out. However, as the adviser on the Cove acquisition, UBS is expected to get a role on the deal.
The planned transaction will include an overallotment option of up to 32.162 million new shares, which will account for 15% of the up to 214.443 million shares that will be placed with investors other than PTT, or 4.95% of the total share sale.
In a note issued yesterday, Moody’s said that PTTEP’s plan to raise equity is credit positive as it will improve the company’s funding mix and reduce its reliance on debt to fund its long-term reserve and production growth plans.
Moody’s changed the outlook on PTTEP’s Baa1 rating to negative in May following the company’s increased takeover bid for Cove, but said yesterday that it will consider revising it back to stable if the equity issue is carried out as planned — and if it results in the cash flow-to-total debt ratio staying above 50%, and the debt-to-average daily production remaining below $19,000 on a sustained basis.
“The acquisition, as well as PTTEP’s substantial capex program of $3.6 billion for 2012 — which was originally envisaged to be partly debt-funded — would have resulted in the company breaching its downgrade triggers, such that retained cash flow to total debt would fall below 50% and debt to average daily production would exceed USD19,000,” the ratings agency said. “But based on the latest announcement, Moody’s expects PTTEP’s retained
cash flow to debt to remain above 50% for 2012 and 2013. However, its capex could remain elevated in the medium- to long-term, if the Mozambique LNG exports project obtains a final investment decision status in 2013.”
In June, PTTEP also raised $500 million from the sale of a 30-year bond that was priced with a coupon and yield of 6.35%. That deal was led by Citi, Deutsche Bank, HSBC and UBS.
