Red-hot sector turns up the heat

Oil prices drive energy stocks but coal miner Banpu leads the pack

YUTHANA PRAIWAN and BUSRIN TREERAPONGPICHIT

Speculators on the energy sector enjoyed hefty yields last year, with runaway oil prices driving shareholder returns to unprecedented heights.

Petrol prices in Thailand and elsewhere continue their upward rise as crude oil surpassed $135 a barrel for the first time on May 22, following unexpected drops in US crude and gasoline stocks in a tight market. — AFP

Energy and utilities stocks outperformed the Stock Exchange of Thailand index as global oil prices passed US$100 per barrel in 2007.

The prices of oil and refined products traded on the Singapore market hit record levels as crude oil prices rose on fears of supply shortages, a depreciating US dollar and speculation by hedge funds and sovereign wealth funds.

Oil prices are sensitive to geopolitical tensions, which could affect the limited supply. A lack of new oil reserves also means that the existing supply can no longer meet growing demand from emerging Asian economies.

Exacerbating the situation was the concern about a global recession triggered by the US sub-prime credit crisis. Big and small punters worldwide have been shifting even larger portions of their investment portfolios to commodities to minimise the impact of the weakening US dollar on stock markets.

Due to these factors, the energy sector ranked second out of 25 on the SET in terms of total shareholder return (TSR), with an average TSR as of the end of December 2007 at 73.35%. Average yields were 33.97% over three years, 53.06% over five years, and 22.83% over 10 years.

Even though oil was the key commodity driving up the yields of energy stocks last year, the top performer was the regional coal miner Banpu Plc (BANPU), with a TSR of 126.87% for one year, 45.47% for three years and 72.91% for five years, on capitalisation of 108.6 billion baht.

KGI Securities attributed Banpu's outstanding performance to higher-than-expected coal prices, driven by strong growth in demand, and supply concerns due to rail and port bottlenecks, as well as declining exports by some countries.

Banpu's success has been due in no small part to its long-term strategic plan, aimed at balancing returns for both short-term investors looking for capital gains and long-term ones expecting dividends.

Now that its investments have started to generate income, its performance has improved dramatically, with share prices moving between 214 and 503 baht during the year.

Phatra Securities says the near-term rise in coal prices will continue to act as a catalyst for Banpu's strong performance, as does the potential volume growth from its merger and acquisition policy.

The company's earnings per share stood at 84.3% in 2007, with the price per earnings of 18.79 times. It paid total dividends of 8.50 baht a share.

Meanwhile, PTT Plc (PTT), the country's largest energy group, continued to grow strongly in 2007, with market capitalisation of 1.05 trillion baht, the largest on the Thai exchange. The group generated a TSR of 86.25% for one year, slightly above the energy sector's average one-year return of 73.35%.

Its dividend yield in 2007, however, was 3.2%, slightly lower than the 3.3% it returned in the previous year.

In terms of capital gains, PTT's share price was under heavy pressure in 2007 pending the outcome of a lawsuit filed by social activists seeking to delist the majority state-owned company. Barring that, the skyrocketing oil prices that were the global trend could have driven its share price up more.

PTT's return on equity (ROE) stood at a robust 30% thanks to the controlling stakes it holds in most major oil-and-gas companies, all of which reaped huge returns in face of the high prices of petroleum-related products.

With an investment budget of 943.39 billion baht from 2008 to 2012, PTT has forged ahead with its massive expansion plans to help solidify its position as Thailand's national energy conglomerate.

Its crown jewel, PTT Exploration and Production Plc (PTTEP), with the second-largest market capitalisation of 540.7 billion baht, also fared well for investors in 2007. PTTEP generated TSRs of 75.06% for one year, 7.76% for three years and 22.54% for five years.

The company's investment discipline has been the major engine driving its returns, said chief executive Anon Siriseangtaksin.

With its high success rate in exploration -  seven out of a total of 11 wells -  PTTEP's risk on investment is below the average for global exploration and production (E&P) players.

It is also focusing on securing as many new resources as possible, in addition to E&P licences in 14 countries.

PTT's refinery arm, Thai Oil Plc (TOP), also did well in 2007. Capitalised at 176.46 billion baht, it delivered the fourth-highest TSR for a one-year investment of 73.86%, compared to 25.69% over three years. TOP benefited last year from increased revenues from its gross refining margin, which jumped in line with skyrocketing oil prices.

The sector's worst performer in 2007 was Sino-Thai Resources Development (STRD), which delivered a -36.88% TSR for one year, -40.60% for three years and -0.20% for five years.

For the power generation segment, 2007 was not a good year, as most players were burdened with high production and raw material costs in line with fuel prices. Their incomes, meanwhile, were fixed under 25-year power purchase agreements with the Electricity Generating Authority of Thailand (Egat).

Electricity Generation Plc (EGCO), capitalised at 58.9 billion baht, remained at the top performer among power firms. The company offered a 21.99% return to shareholders last year and 19.76% over three years thanks to its ever-expanding long-term investments.