RSSThai Companies Pan For Gold in Silver Linings (Part I)
By Paul Baiocchi | September 23, 2008 | 2:54 PM | 2 Comments
Even in an economic slump, there are companies that thrive. As an investor, it pays to look both for companies that are naturally situated for survival in a recession-resistant industry or locale and those that position themselves to rise above the level of their peers.
I recent traveled to Thailand, where I took a close look at how two companies in two different industries are preparing for and reacting to economic conditions that are putting on the brakes both locally and globally.
One is PTT Exploration and Production Public Company Limited or PTTEP, a national petroleum exploration and production company established in 1985. All of its products are sold to its parent company PTT. The company has a market cap of $15 billion and pays a semiannual dividend.
Currently PTTEP is involved in 40 petroleum and petroleum-related projects in Thailand- including major gas fields in the Gulf of Thailand-and 14 additional projects across Southeast Asia and into Iran, Oman, Bahrain, Egypt, Algeria, Australia and New Zealand. PTTEP earns 20% of its revenues from outside of Thailand and aims to raise this proportion going forward.
The company has a production output of approximately 230,000 barrels daily and, as of year-end 2007, proven reserves of 946 million barrels of oil equivalent, of which 80% are natural gas reserves.
In line with companies world wide, PTTEP benefitted from the recent spike in oil prices to post an increase of 82% in second-quarter 2008 profits over a year earlier. Along with price increases, a voluntary boost in production, especially in the company's Gulf gas fields, helped profits along.
But as economic slowdown threatens to encircle the globe, how is this company likely to fare? Although PTTEP supplies some product to Myanmar and Oman, its largest market is within its national borders. Does this leave it vulnerable to instabilities in the local economy?
In PTTEP's case, the nature of the petroleum industry itself provides buffers. For one thing, oil is a U.S. dollar based business. The tie that links the company's revenues and capital expenditures to the dollar works as a natural hedge against devaluation of the Thai baht.
However, right now it is the baht's relative strength against the dollar that threatens Thailand's export-reliant economy. In this situation, PTTEP is protected against the demand-dampening effects of a slowdown by the fact that 70% of PTTEP's product is natural gas-destined for power stations, not the tanks of gas guzzlers. People can drive less and still get their work done, but they can't continue to produce the exported goods that drive 60% of Thailand's GDP without power.
As long as Thailand has at least 4-5% growth, gas demand should not drop significantly. But even if the growth rate dips below this level, the effects are not expected to be dramatic. During the Asian crisis of 1997, Thailand's GDP slipped into negative numbers and, yes, power consumption dipped, but it recovered in a year. And even in the worst of times, PTTEP was able to create growth.
With natural recession-resistance and a history of forward-thinking E&P choices, PTTEP looks to do well in riding out any stormy weather that reaches Thai shores.
This is part 1 of a four-part series covering Paul's visit to Thailand on behalf of Delta Global Advisors
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