SET Announcements

the project. Besides, the appropriate combination between the new shares and convertible debenture would keep D/E ratio in shape. * Long-term investment positioning by PTT would be a good image and make confidence to existing as well as several investors. * This investment would be expected to enhance the company's competitiveness as well as increase its revenue stream; thus enhance shareholders' wealth. * Holding additional portion by PTT ensures Thai nationality status in such a potential national business. * As the major shareholder in PTT is MOF, increase shareholding in the company by PTT would be considered larger stake of MOF. MOF has supported the company such ways as being guarantor for the bank loan and principal of the BCP-DR1. * The negotiation process for issuance of the new shares and convertible debenture will be quicker and smoother. * Considered as a business synergy, PTT finds it necessary to establish effective business collaboration with BCP by jointly determining BCP's policies to be in line with PTT's existing operations in a way that BCP is an affiliated company within the PTT's group in order to maximise the benefits for both PTT and BCP, a summary of which is as follows: - PTT to manage the supply and transportation of feedstock to BCP. By this method, the cost for the procurement of feedback incurred by BCP will be reduced because the increased volume of PTT's feedstock procurement will lead to economies of scale. - PTT and BCP to jointly re-organise the oil distribution channel. BCP is the centre for the distribution of oil products in Bangkok and the Greater Bangkok. In this event, PTT will fully swap the oil products for the central and regional areas with BCP. This means that in the future BCP will reduce the transporting oil from its refinery to its gas service station in other provinces. This strategy will support the government's policy to enhance the capacity of BCP's and PTT's depots as the oil distribution hub of Bangkok and the Greater Bangkok. Finally, the oil transportation costs and expenses will be significantly lessened in the interest of PTT, BCP, and the country. - It is to solve the problem on the business operation of BCP in the long run by converting fuel oil with the installation and use of hydro cracker to help production of high quality diesel and gasoline to serve market demand in the future. PTT and BCP have discussed and agreed on the business collaboration by entering into three contracts and memorandums of understanding. A summary of the key terms are set out as follows: Product Offtake Agreement * Product offtake. Before completion of the PQI Project (before the commercial operation date of the PQI Project), PTT is entitled to offtake the following products from BCP: - Up to 30% of BCP's production for all products other than LPG and fuel oil high pour (excluding BCP's existing retail market). Both parties shall agree on the product swap and/or the reduction of the transportation costs between their depots. - Up to 100% of LPG and fuel oil high pour from BCP's production.The company and PTT will consider setting the certain amount later. - The purchase price by PTT is Ex-Refinery. After completion of the PQI Project (from the commercial operation date of the PQI Project), PTT will be entitled to offtake the following products: - Not less than 5 - 10 million litres per month for Jet A-1. - Not less than 30% of BCP's production for gasoline and diesel. - All BCP's production in excess of BCP's retail market. - Up to 100% of LPG from BCP's production. The company and PTT will consider setting the certain amount later. - In case BCP cannot, in any reason except for refinery shutdown period, supply the agreed amount of each above products causing higher price supply from other sources to PTT, BCP will compensate the additional cost to PTT. - The purchase price by PTT is Ex-Refinery. Both parties will enter in an agreement of the Product Swap and/or Reduction of Finished Product Conveyance. Feedstock Supply Agreement * The terms and conditions of the Feedstock Supply Agreement between PTT and BCP, including pricing structure will be based on those of the feedstock supply agreements which PTT has executed with its affiliated companies engaged in refinery business. * PTT will consider procuring all imported feedstock for BCP as PTT can manage feedstock procurement to other refinery affiliated companies. This would lead to collaboratively utilize facilities resulting in minimizing procurement cost. * The pricing structure for the feedstock supply from PTT to BCP is as follows: Market price + Administrative fee Memorandum of Understanding on Logistics * PTT and BCP will jointly conduct a study on how to do a product swap in order for BCP and PTT to be the central distributor of oil products in Bangkok and the Greater Bangkok. * PTT and BCP will jointly study on how to use their existing Thappline, FPT line, oil depots, ports and facilities in order to maximise benefits. 2.3.2 Concerns on offering the new shares and convertible debenture to PTT * Considering both PTT's direct holding and holding BCP-DR1 with the voting right through Siam DR, this new share offering would result in the increasing shareholding of PTT in the company, from 7.71% held thru BCP-DR1 at 52,240,000 units as of July 5, 2005 to not more than 42.94%. * PTT is not running refinery business itself but has held the stake in 3 refining companies which are (1) Thai Oil Plc. (49.54%) (2) Rayong Refinery Co., Ltd. (100.00%) and (3) Star Petroleum Refining Co., Ltd. (36.00%). The conflict of interest in term of the quantity offtake from each refinery plant would stand. However, PTT entered into crude oil and refined product supply agreements with its affiliated refining companies at rates corresponding to PTT's equities in such refining companies. The agreements are summarized below. Agreement with Thai Oil Plc. (TOP) PTT contractually provides crude oil and takes products equal to 49.99% of TOP's refining capacity. Through a written notice sent at least 12 months in advance, either party may revoke this agreement from the 13th year from the date of completion of debt restructuring. Alternatively either party may revoke the contract it deems the contract violated. Under the contract, PTT may buy more than 49.99% at market prices. Agreement with Rayong Refinery Co., Ltd. (RRC) An RRC shareholders may buy refined products from RRC upward of 70% of its refined products at domestic market prices under a 12-year agreement, starting from the date of commercial start - up, beyond which the contract is assumed to continue unless notified otherwise in advance. Agreement with Star Petroleum Refining Co., Ltd. (SPRC) Shareholders of SPRC must secure crude oil and take refined products from SPRC at no less than 70% of the 126,000 bbl/d capacity - or 88,200 bbl/d - at domestic market prices. For any surplus volume produced by SPRC, PTT and Caltex Oil (Thai) Co., Ltd. - as shareholders - have the first right of refusal to buy at domestic market prices before sale to a third party. In addition, regarding the conflict in term of running gas stations by both parties, PTT will respect the policy of each company that deems appropriate in the business and economic wise. 2.3.3 Concerns on offering the new shares and convertible debenture to others * In case of the private placement offering to strategic and/or financial partners, the company is challenged by the following factors: - Amount of the new shares and convertible debenture that each investor can take to ensure sufficient amount for the investment. - Business synergy that those partners could contribute. - Conditions and management experience if the board seat required. - Term of the investment. - Number of strategic partners not more than 2 groups in order to be unique management. However, the public offering will not require the board seat. * In case of the public offering, the company is challenged by the following factors: - SEC and SET approval process is required and would affect delay of the project. - Amount of the new shares and convertible debenture that each investor can take to ensure sufficient amount for the investment. - As a listed company with benchmarked market price, the offering price would generally be set with discount from the market mark by the time close to subscription period. The discount margin will depend upon the market condition at the offering time and this might cause unexpected pricing. * As the company's foreign limit of 10%, the allocation for both new shares and convertible debenture need to take this constraint into account. 2.4 Other concerns * Changes in shareholding structure among MOF, PTT, and Vayupak I can be demonstrated - given the event after the offering to PTT and the event after conversion of the CDDR by Vayupak I (assuming that (1) the CDDR has not yet convert by other holders and (2) the ESOP warrant has not yet exercised) - as following table: Shareholder As of After the offering After conversion August 30, 2005 to PTT of the CDDR (3) No. of share % No. of share % No. of share % PTT (BCP-DR1) 52,240,000 7.71% 52,240,000 4.66% 52,240,000 4.62% PTT (Common share) 0 0.00% 283,000,000(1) 25.24% 283,000,000 25.02% MOF (BCP-DR1) 124,947,970 18.45% 124,947,970 11.14% 124,947,970 11.04% Vayupak I (BCP-DR1) 20,831,400 3.08% 20,831,400 1.86% 30,993,006 2.74% Total- related parties 198,019,370 29.24% 481,019,370 42.90% 491,180,976 43.42% Others 479,127,576 70.76% 640,127,576(2) 57.10% 640,127,576 56.58% Subtotal 677,146,946 100.00% 1,121,146,946 100.00% 1,131,308,552 100.00% Remark: (1) Assuming 283 million of new shares offered to PTT. (2) Assuming 161 million of new shares offered to institutional investors. (3) Assuming being converted by Vayupak I only. * If, as a result of this proposed transaction, PTT would hold more than 25% of the total issued shares in the company, PTT will have the right to additionally appoint its representatives to act as directors of the company in proportion to its shareholding after the transaction. PTT's designated representative may be new directors or directors replacing the resigning directors which will be appointed in compliance with the company ' articles of association and applicable laws. This new director appointment is required the resolution from the shareholders' meeting. 3. Fairness of Price and Terms BCP has intended to invest in Product Quality Improvement (PQI), which approximately costs at $250-350 million or Baht 11,250-15,750 million. The financial sources of PQI project come from private placement about $150 million or Baht 6,750 million consisting of 1) PTT about 100-120 million or Baht 4,500-5,400 million a) common shares not more than 283 million shares at 14-16 Baht per share b) convertible debenture not more than $41.7 million or 135 million shares 2) financial institution not more than $50 million or 161 million shares given not less than 14 Baht per share and project financing loan for the rest. Common Stock 1.1 Comparison of Offering Price with Various Approach With regarding to invest in PQI, BCP appointed independent Financial Advisor (KEST) to evaluate the appropriate value of BCP share in order to be a guideline for shareholders to make decision. The approaches, used to appraise the value of BCP share are composed of Book Value method, Market Value Method, Discounted Cash Flow, Price Earning Ratio, Price to Book Ratio, and Enterprise Value to EBITDA. 1.1.1 Book Value Method The equity section of financial report of BCP as of 30 June 2005* is following Unit: Million Baht Issued and paid-up common shares 663.16 Premium on common stock 1,627.67 Premium on reduce registered capital and paid up capital 189.62 Premium on asset valuation 4,613.39 Retained earning Retained earning-Legal reserve 86.71 Retained earning-Inappropriate 4,280.98 Total equity 11,461.53 Amount of paid-up shares (Million shares) 663.16 Book value per share (Baht per share) 17.28 Total equity included remaining CDDR and ESOP 14,155.30 Amount of registered shares (Million shares) 867.14 Fully diluted book value (Baht per share)** 16.32 Note: * Review financial statement as of June 30 2005 from A.M.T. Associate Co.,Ltd ** Book value included shares from CDDR and ESOP The book value and the fully diluted book value of BCP as of 30 June 2005 are 17.28 Baht per share and 16.32 Baht per share However, the book value of the company is the value of the company at one point of time if it liquidates and pays all debts and doesn't care about the future operation and overall economic and industrial expectations. Furthermore, for inventory policy, First In First Out (FIFO) method also enhances the net profit, especially in upturn price period, because the cost of sold in FIFO is the price in last 1-2 months that is less than current price. On the other hand, the performance of the company used FIFO will drop when the price is downturn. Consequently, the appraisal value from book value, stemmed from high price volatility industry, is volatile and difficult to predict. 1.1.2 Historical Market Value Method The market value method is average market price of common stock traded in SET market over a period of time. The company got board of director resolution to raise additional fund via Private Placement on August 29, 2005 in order to finance the PQI. The average prices of BCP's common shares on August 26, 2005 and over 7 days, 15 days, 30 days, 60 days and 90 days are following: Table: Average price of BCP's common share (Year 2005) Aug 26, 7 day 15 day 30 day 60 ady 90 day 2005 average average average average average Aug18-26 Aug5-26 Jul14-Aug26 Jun 1-Aug26 Apr12-Aug26 Price (Baht/Share) 14.90 14.11 13.67 13.55 13.64 13.38 Average volume per day (Million Shares) 4.69 4.44 2.31 1.48 1.13 1.08 Table: Average price of BCP-depositary Receipts (BCP-DR1) (Year 2005) Aug 26, 7 day 15 day 30 day 60 day 90 day 2005 average average average average average Aug18-26 Aug 5-26 Jul14-Aug26 Jun1-Aug26 Apr12-Aug26 Price (Baht/Share) 15.10 14.61 14.26 14.13 14.25 14.11 Average volume per day (Million Shares) 2.00 4.65 2.46 1.86 1.94 2.28 Referring to above tables, BCP-DR1 are normally higher than BCP shares because BCP-DR1 are guaranteed by Ministry of Finance to buy BCP-DR1 at 13 Baht per share over 10 years since listing in SET whether BCP-DR1 holders sell to Ministry of Finance; however, the shares raised by private placement are common shares not BCP-DR1. Thus, the investors should consider only BCP shares. Before the resolution of Board of the directors, the tentative price range with Baht 14-16 per share is relatively higher than historical market price over 15 to 90 days. However, the market price would represent the partial value of PQI project because the company discloses in annual report 2004 (Form 56-1) 1.1.3 Discounted Cash Flow Method ( DCF) Generally, the DCF method is the present value of free cash flow that the company earns from the future operation based on reasonable current and future assumptions. With regarding to DCF method, the assumptions that the FINANCIAL ADVISOR used are based on the information from management, Financial Advisor, and financial statements of BCP. FINANCIAL ADVISOR realizes income and cost structure of oil refinery based on factory capability, crude price and oil price. Moreover, the financial model takes into account revenue, cost of goods sold, expenses, capital budgeting and cost of capital in the future. The DCF method is one of the suitable valuation methods to appraise the share price of BCP because the DCF method reflects the actual operation of the company and the comparable companies are difficult to find. Furthermore, the revenue and Gross Refinery Margin (GRM) will be improved dramatically in 2008 due to PQI project. In addition, the cost of crude is the major cost of BCP. Normally BCP buys crude from many sources based on crude price and efficiency in production. However, DCF method will be valuable if the information input is valuable. Therefore, if future incidents are different from the DCF assumption, the result from DCF will be changed accordingly. Key Assumptions of Financial Model (Between 2005-2019) * The sources of assumption in financial model are from information memorandum by BCP, overview and trend of the oil market: implication for Thailand by Petroleum Institute of Thailand and interviews from management. * Refinery capacity of BCP at 100,000 barrel per day and 338 operating days per year * Finished oil sale directly relates to change in economic growth. Financial Advisor assumes that sale volume of finished oils (excluding diesel and fuel oil) grow at 5% per year from 2005 to 2009 and at 4% since 2010 onward. Sale volume of diesel grows at 8% from 2005 to 2009 and at 7% since 2010 onward. Normally, sale volume of fuel oil is constant over the time because most of the sale volume is in contracts. However, after 2006, EGAT Plc. will use natural gas instead of fuel oil so sale volume in 2007 will decrease about 35% comparing to 2006. Then, sale volume of fuel oil grows at 0% since 2007 onward. * Financial Advisor assumes crude and finished oil prices in long term because the crude and finished oil prices are highly sensitive to world economic environment that is unstable. The details of crude and finished oil prices are following. Crude Oil Price (US Dollar per Barrel) MURBAN 39.78 UMMSHAIF 39.60 TAPIS 43.04 PHET 34.71 PATTANI 41.28 Crude Blend 39.63 Ethanol 51.67 Note Price excluding tax and fee Finished Oil Price (US Dollar per Barrel) LPG 35.41 GASOHOL 95 50.28 GASOHOL 91 48.31 JP-1 48.28 DIESEL 48.87 FUEL OIL 33.80 Note Price excluding tax and fee *The proportion of oil that BCP produces before and after PQI project is follows: Oil Type Portion before PQI Portion after PQI LPG 3.6% 3.8% GASOHOL95 6.6% 9.1% GASOHOL91 11.7% 16.5% JP-1 14.2% 8.8% DIESEL 29.7% 53.0% FUEL OIL 34.2% 8.7% * Gross refinery margins (GRM) of BCP in regarding to existing BCP and existing BCP including PQI are following GRM US Dollar per Barrel Hydroskimming with co-cracking 2.02 Hydrocracking 6.22 Financial Advisor doesn't include additional clean fuel benefit from increasing oil price ceiling allowed by government in order to compensate higher cost of production since year 2011 onward, because clean fuel allowance policies are not certain. Clean fuel policy is the policy that government intends to implement so as to enhance oil product quality. * Finished oil prices (excluding JP-1) or transfer price that is price between refinery department and marketing department of the company normally discount from ex-refinery approximately Baht 0.05 per litre or $0.20 per barrel due to evaporation of oil. Marketing margins of finished oil are following: Type of Finished Oil Baht per Litre Wholesale Gasoline 0.68 DIESEL 0.38 FUEL OIL 0.46 Industrial Sale Gasoline (except JP-1) 0.46 JP-1 0.18 Overall Marketing Margin Overall Marketing Margin 0.30 * BCP currently coordinates with Thai Oil as a refinery improvement program from 2005 to 2007. BCP earns benefit from this program approximately Baht 250-360 million/year. BCP also gets benefit from Patani crude about Baht (more)