Thai oil-and-gas group PTTEP tapped multiple asset classes to finance an ambitious African acquisition, at one point, even considering a hybrid capital issue.
Source: REUTERS/Chaiwat Subprasom
Thai market vendors pull back awnings and their produce off a railway track to allow a cross-country train to dissect through the middle of the town of Maeklong.
PTT Exploration and Production is trailblazing Thailand’s corporate expansion beyond its shores, leaving an indelible mark with last year’s purchase of Britain’s Cove Energy for nearly US$2bn. The largest offshore acquisition in Thailand also triggered landmark fundraisings for PTTEP.
Raising funds, however, was not all smooth sailing for the oil-and-gas explorer. PTTEP encountered a number of challenges at each step as it juggled financing needs to meet its large appetite for capital. Each time, though, the company was able to overcome barriers, the key of which was continuous dialogue with all stakeholders, whether they were shareholders or creditors.
“We engage openly with our stakeholders to listen to concerns and expectations in all areas of the business,” said Penchun Jarikasem, PTTEP’s chief financial officer. “We believe that our transparent communication and our response to stakeholders’ concerns have demonstrated our commitment to deliver our strategy and promises, and have imparted greater confidence amongst investors.”
The flexibility allowed PTTEP to avoid trouble when it quickly changed tack in September to issue a US$500m five-year senior security instead of a US dollar perpetual bond, as first planned.
PTTEP, a unit of Thai energy firm PTT, had marketed the US dollar corporate hybrid during a roadshow in April this year. Perpetual securities were the flavour of the month in the US dollar markets last spring, since the interest rate and market environment were favourable for companies to raise debt with an equity treatment and avoid dilution to existing shareholders.
PTTEP was keen to issue one of these hybrid securities, having put out Thailand’s largest and only corporate hybrid in the baht bond market last year. “It was an attractive opportunity to add non-dilutive equity to PTTEP’s balance sheet at an attractive cost,” said Penchun.
Soon after the roadshow, however, investors began to fret over a possible US pullback in its long-time accommodative monetary policies. As the ensuing volatility in the markets made it difficult to go forward with a hybrid, PTTEP changed course and issued the senior unsecured notes. The move was well timed as the company sold the senior notes at US Treasuries plus 200bp, 10bp inside the bonds estimated fair value.
This same flexible approach proved significant last year, when PTTEP refinanced the £950m (US$1.5bn) bridge loan it used to buy Cove Energy. To refinance the bridge, PTTEP planned to undertake offerings of stock of US$3bn-equivalent and perpetual securities of Bt5bn (US$159m).
The local currency hybrid meant PTTEP was the first Thai corporate issuer to offer a new investment option to institutional and retail investors seeking to deploy cash.
The hybrid immediately ran into trouble. The Securities Exchange Commission of Thailand, concerned that retail investors could not differentiate between hybrids from banks and those from corporate issuers, sent out a warning to retail investors.
Perpetuals are undated bonds often with deferrable coupons under certain conditions. Under the hybrid terms, PTTEP would have sole discretion over when it deferred a coupon, unlike bank hybrids, with which investors were more familiar. With these, banks can only defer coupons either when they post financial losses or when they register sharply lower profits.
This meant PTTEP had to work doubly hard with its lead managers to educate individual investors and, at the same time, alleviate the SEC’s concerns. It paid off as retail investors bought the bulk of the issue.
Other problems beset the stock sale portion of the financing. Initially, the company had planned to sell up to 650m shares, of which parent PTT would take the bulk to maintain its 65.29% stake, leaving 214.44m for the public. Minority shareholders cried foul as they had to compete with the public for a slice. Eventually, PTTEP confined the sale to existing shareholders.
The share placement closed successfully in December and, in increasing its cash-to-debt ratio, became a key to PTTEP’s improving financial profile.
As a result of the share sale, PTTEP built up sufficient flexibility to meet upcoming capital-expenditure requirements and to undertake smaller acquisitions without jeopardising its rating. Hence, following the stock sale, Moody’s revised the company’s outlook to stable from negative in April.
PTTEP’s strong financial standing will support its ambitious five-year expansion programme. The company plans capex of US$15bn over the next five years on existing and new global assets and in opportunistic acquisitions.
Penchun said that, come 2020, the company planned to reach a production target of 600,000 barrels of oil equivalent (BOED), of which 100,000 BOED would be attributable to mergers and acquisitions.
“We will consider entering into M&A transactions if such projects meet our minimum investment-return criteria and add value to our shareholders,” the CFO said.
The company was unlikely to pursue another stock sale anytime soon, she added.
“We continue to she added with strong financial discipline and have sufficient cash flows and debt funding flexibility to achieve our existing investment plans without needing to tap the equity market for at least another three years,” Penchun said.
PTTEP has illustrated its innate capability and savvy to adapt to fast-changing trends, a trait that will give the company an edge at this crucial time with the rapidly changing investor appetites and fluid market conditions.
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