Where your energy money goes

Investing in SET's biggest sector means placing a heavy bet on PTT, the government and the price of oil

ALEXANDER WOOD

After generating total shareholder returns of around 70% in 2007 (according to PYI figures), by year-end, Thailand's listed energy sector (including petrochemicals) had a total market capitalisation of around 2.5 trillion baht.

That's equivalent to approximately 40% of the total equity capitalisation of the entire Thai stock market. What if an investor decided to make an investment in the Thai listed energy sector at around year end 2007 with allocations weighted in accordance with market capitalisations? What would he/she be betting on?

To keep the explanation relatively simple, let's start by imagining that the investor decided to invest just 25 baht (in line with the sector's 2.5-trillion-baht capitalisation).

The first observation is that the investor would be putting about 22 baht (or nearly 90% of his money) into the PTT corporate empire, which, of course, in turn, is controlled two-thirds by the government. So, pretty much, you'd be putting your money ultimately in government hands -  and linking your fortunes to oil in some shape or form.

Secondly, about six baht of this 22 baht in the PTT empire would actually be double exposure via PTT itself to five listed refining and petrochemicals companies and one upstream company. Thirdly, about four baht of the total 25 baht invested in the "Thai" listed energy sector, would in fact be a bet on overseas oil, gas and coal assets (mainly in Burma and Indonesia).

The full breakdown of the investor's 25 baht would be roughly as follows:

- Nine baht in refining and petrochemicals: Direct exposure worth about 6 baht to a handful of listed refining and petrochemicals companies (Thai Oil, IRPC, Bangchak, IRPC, PTTAR and PTT Chemicals) and a second level of investment, worth just under three baht, in the same companies through PTT itself (which has shareholdings of between 25-50% in these companies); note that 2008 has brought another refinery listing, Esso, and should see one more with SRPC's flotation later this year (which also has a PTT shareholding).

- Nine baht in upstream oil and gas: Direct exposure worth just over five baht through PTTEP and a doubling-up, of just under another four baht, through PTT (PTT owns 67% of PTTEP); about seven baht of this is upstream natural gas exposure, and about two baht is crude oil; also about a third of the overall value (so about three baht) is effectively exposure to foreign upstream fields such as Yetagun, Yadana and M9 in Burma and 16-1 in Vietnam; PTTEP has interests in nearly forty E&P projects worldwide, including North Africa, the Middle East, South-East Asia and Australia/NZ; about one-third of PTTEP's proved reserves (just under a billion barrels of oil equivalent) are overseas.

- Four baht in midstream gas (and oil): Through PTT, investment in its core gas transmission and gas separation plant businesses (which do not have a separate listing) as well as its oil marketing and trading businesses; note that many analysts value PTT's midstream gas business at nearer six baht (i.e. around 600 billion baht) using discounted cash flow methods.

- Two baht in power generation: Exposure to around 9GW out of Thailand's 30GW of generating capacity through investment in RATCH, EGCO, GLOW, BANPU and a couple of others; note a small doubling-up effect through Banpu's 15% in RATCH and exposure to BLCP (1.4GW coal-fired) 50/50 through investment in Banpu and EGCO.

Note also that there is very little exposure to power assets outside Thailand (probably less than 10 satang of value, mainly in Laos, with just a taste of China through Banpu's interests there) -  and hardly any exposure to renewables, probably not much more than one satang (mainly through Solartron).

FOne baht in coal-mining: Principally in Indonesian export-grade coal, primarily through Banpu's 74% share in Jakarta-listed ITM, and to a much lesser degree through Lanna; investment in Banpu also provides some exposure to the Chinese, Lao and Thai coal sectors, though not much (China coal is still small for Banpu, Laos is still a project through Hongsa and the Thai coal mines are being closed).

What parts of the Thai energy sector would the 25-baht investment not give exposure to?

The short answer is: around two-thirds of Thailand's upstream oil and gas production (largely controlled by Chevron and other international players), about 10% of Thailand's refining capacity (until SRPC is listed), more than half of Thailand's power generating capacity -  and nearly all lignite mining output (Egat's privatisation having been cancelled twice).

Alexander Wood is a Director of AWR Lloyd (mining, energy and metals advisory). He has been strategic and IR adviser to Banpu PLC since 2000 and works as strategic adviser to a number of oil companies in emerging Asia. He can be contacted at wood@awrlloyd.com