Thai Oil IPO: record demand for refiner

Massive order book fuels South East Asia''s largest IPO of the year.

Thai Oil generated an enormous $16.5 billion order book for its Bt29.1 billion ($705 million) IPO yesterday (October 13), prompting an allocation nightmare for its six leads - Bualuang Securities, Finasia, JPMorgan, Merrill Lynch, Morgan Stanley, Phatra and SCB.

If the greenshoe is exercised, the deal will have raised Bt32.5 billion ($788 million), making it the largest ever IPO from Thailand and eclipsing that of its own parent PTT, which raised Bt32.2 billion in November 2001. With a base deal size of 909.88 million shares, the offering was priced at the very top end of its Bt27 to Bt32 indicative price range.

All tranches closed multiple times oversubscribed, with an international order book of around $10.6 billion and domestic order book around $5.8 billion. As an oversubscription ratio, bankers say the international book was about 30 times covered and the domestic book (retail and institutional) about 15 times covered.

Together demand amounts to just over a whopping 16.5% of the SET's $100 million market capitalization and about 28 days trading volume. Not since Malaysian satellite operator Astro, has an Asian deal weighed so heavily on its domestic stock market. The Malaysian company priced a $530 million IPO last October accounting for 29 days trading volume and 11.5% of the market capitalization.

Bankers say 50.7% of the base deal for Thai Oil was allocated to international investors (461.288 million shares) and 49.3% to domestic retail and institutional investors plus existing investors (448.592 million shares). The greenshoe, however, will see 37% placed internationally (40.4 million shares) and 63% domestically (67.3 million shares).

Post deal, PTT will own 49.99% of the group. Roughly 87% of the shares were sold by a group of creditors housed under a Mauritius SPV that was wound up as a result of the deal. However, a number of creditors wanted to hold onto their stakes and were allowed to re-subscribe to the offering. Their allocation was set at 15% at the beginning of the deal and subject to either a staggered lock-up over one-and-a-half years or full two years.

Specialists say that over 400 foreign institutions placed orders, although about 150 were completely blanked. Around 15 investors placed orders for more than $100 million and more than half a dozen for more than $200 million.

Allocations are said to have been evenly cut between Thai specialists, Asian specialists and global sector funds. By geography, Asia is said to have accounted for roughly 50%, Europe 30% and the US the remaining 20%.

Demand of such a large magnitude is not surprising in the context of record high crude oil prices. What is more surprising is the price range. The vendors had an opportunity to increase it at the end of pre-marketing, but specialists say PTT in particular was keen to keep it where it was.

Says one, "PTT wanted to generate exceptional momentum and goodwill towards a company that will act as the consolidator of Thailand's refining industry."

The end result represents a spectacular success for a company that only completed its last debt hair cut earlier this year. Specialists believe there are three main reasons why demand was so strong.

Firstly, timing has been incredibly fortuitous in the context of both the Thai stock market and global oil sector. Where the former is concerned, bankers say foreign investors have become net buyers again over the last two months after 12 months of net selling.

Year-to-date, the market remains one of Asia's worst performers down 14%. But, bankers believe Thai Oil's success may give it new momentum and indeed PTT has surged 20% over the course of roadshows as investors price in greater EPS potential from Thai Oil.

But the biggest momentum driver has undoubtedly been the global oil sector and the huge uptick in crude oil prices and refining margins, both of which stand at record highs. During the first half of the year, Thai Oil recorded an average gross refining margin of $6.48 per barrel per day (bpd).

However, by the end of the second quarter it was up to $9.20 bpd and by the end of the third, it had topped $10. At the height of the sector's downturn in 2001, by contrast, the company was only managing $1 bpd.

Syndicate profit forecasts assume that refining margins will normalise during 2005/2006 and return back to $5 to $6 bpd. However, with crude oil prices showing no sign of dropping, there may be plenty of investors who believe that the sector will continue to surprise on the upside.

The main danger now lies in sharply increasing crude oil prices - to $60 per barrel and possibly above. Gas and oil bankers believe the inflexion point where Thai Oil will no longer be able to pass on these prices to its customers is not far off.

The second major success factor has been attributed to asset quality. Thanks to an ambitious capex programme that proved its undoing during the financial crisis, the company now has the most complex and sophisticated refining operations in Asia.

Its upgrading ratio - ability to turn crude to refining products - currently stands at 73%. The second highest in the region is Caltex Australia at 67%, with Korea's S-Oil on 33%.

Relative to these regional comparables, Thai Oil has been priced very reasonably. At Bt32 per share, it has been valued at 7.3 times 2005 earnings on a P/E basis and 5.5 times 2005 EV/EBITDA.

Globally, analysts say pure refining companies average 9.5 to 10 times 2005 P/E and just over 6 times 2005 EV/EBITDA. In Asia, the comparables are all over the place with the Indians (BPCL and HPCL) trading at the bottom of the food chain on 6 to 7.5 times 2005 P/E and Caltex Australia at the other end on 13 times.

Analysts say the formers' lower valuation can be explained by regulatory concerns, with the Indian government currently preventing the major refiners from passing on high crude prices.

The third major reason for Thai Oil's success lies in its future growth prospects.

The group's current capacity stands at 220,000 bpd, giving it a dominant 21% market share of the domestic industry. During roadshows management said they hoped to expand capacity to 270,000 bpd by the end of the 2006 and would do so through de-bottlenecking rather than greenfield projects that would push capex costs up.

However, specialists say it also hinted at the possibility of asset injections from its parent. Specifically this would comprise the 145,000 bpd Rayong Refinery, which PTT recently bought off Shell. What it did not specify is who will fund the government's ambitious plans to create a giant eighth refinery in Southern Thailand with a capacity of 500,000 bpd.

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