Bullish on Indo gas
plays – Medco, Energi Mega, PGAS
Indonesian gas prices, be it at upstream (well-head) or downstream
(LNG, piped gas), are at ridiculously low levels now. Market forces will lift
them
up over-time, with biggest upward revisions happening between now and end-2010
(ending of LNG contract between Indonesia-Japan). This re-pricing process will
gradually reveal the true earnings and valuation potential for the likes of
Medco Energi (MEDC), Energi Mega Persada (ENRG), and Perusahaan Gas Negara
(PGAS) – beyond what is currently expected by the market. Given that Indo
gas prices have lagged the int'l oil px for years and by miles, a
softening oil price should not change the bull case.
Factors depressing Indo gas price:
·
Long term LNG price contract (big contract ending in 2010,
negotiation ongoing)
·
Lack of pipeline infrastructure (PGAS making good progress)
·
Subsidy on diesel and gasoline (government has been cutting
subsidies)
·
Corruption (see snippet below) (plenty of focus ahead of
election)
MacQ view:
research rates PGAS as Outperform, MEDC as Neutral (coverage in transition),
ENRG Not Rated.
Medco Energi –
favorable price tag for Senoro gas
Pertamina signed head of agreement (HoA) contract for Medco's
Senoro field at a very attractive price of between US$10-11/mmbtu based on
current oil price (US$115). Total deal value is US$16bn, US$12bn of which is
for Senoro. The buyer is PT Donggi Senoro LNG (owned by Mitsubishi, Pertamina,
Medco), which is currently investing US$300mn for 2 mtpa capacity. The sellers
are Medco and Pertamina.
The gas pricing came in way above initial negotiations. Initially, the
agreed price was as low as US$3.85/mmbtu. Then, the adoption of a base formula
led to a negotiated price of US$6-7/mmbtu based on US$100 oil price. Then, the
shift to a new formula led to the agreed US$10-11 price. The negotiation
process took a long time because the government wants to avoid a higher gas
price at upstream vs. downstream. PT Donggi Senoro LNG intends to sell the LNG
to Kansai Electric and Chubu in Japan.
With such good progress in the commercialization of Senoro, we would
not be surprised if later-on Medco monetize Senoro value by selling some stake
to Mitsubishi, who owns a 51%-interest in PT Donggi Senoro. (At the moment, the
market attach close to zero value).
MEDC currently trades on EV/2P of US$9.5/boe. If Libya, Senoro, and Blok A
projects
going well, 2P can triple in '09 (EV/2P falling to US$2.0/boe vs. recent
transactions between US$6-11/boe). Positive progress to date: i) Mitsubishi a
20% indirect owner since Sept '07, ii) Senoro gas price set at US$10-11,
iii) 2Q08 results rock solid. Catalysts: i) US$345mn received for sale of
Apexindo, ii) US$300mn received from sale of 6 non-core oil blocks raising
US$300mn, iii) Conversion of resources into 2P. McQ research coverage under
review, looks like a BUY to me.
MacQ Japan oil&gas analyst comment on Indonesia
LNG
Polina Diyachkina (MacQ analyst based in Tokyo)
visited Mahakam gas field in Indonesia,
operated by a joint venture between Inpex and French oil & gas producer
Total. She also talked to senior local representatives of operating company
Total and Indonesian company PERTAMINA, which owns a 55% stake in the
Bontang LNG liquefaction plant and markets LNG in Asia.
Here are her thoughts on Indo LNG situation:
·
Indonesia theoretically wants to use more gas domestically, but
lacks the facilities to do it. About 12m tpa of LNG are currently
exported from the Bontang LNG plant to Japan, and the Indonesian
government has threatened to cut exports to 3m tpa after 2011, when most of the
contracts meet the expiration date. Indonesia wants to consume
more gas domestically as the country is now a net importer of oil.
However, there is limited capacity to consume LNG domestically - there are
plans to build an LNG receiving terminal on Java Island with capacity of 2-3m
tpa, but it is unclear how Indonesia plans
to accommodate another 6-7m tpa.
·
Export volumes will not be cut
much, in our view. We believe that at this point it is more a
political issue, and do not expect this to be resolved until the general
elections next spring. The lack of domestic receiving facilities, and the fact
that it makes more economic sense to export gas as LNG at market prices,
should eventually help to resolve this issue positively for Japan - we assume
that volumes into Japan will be cut by no more than 3m tpa to 9m tpa from 2011.
·
S-curve will have to go, higher
prices are a must. There is strong pressure from sellers to
renegotiate higher contract prices going forward - the LNG market is very
tight in the region due to growing demand from developing Asia
and is expected to remain so well beyond 2015. The current S-curve formula
that puts a cap to how much LNG prices can move in line with oil does not
satisfy the sellers and may need to be revised to allow for close parity with
oil. There is strong political pressure in the country to revise the prices -
it is in the minds of the producers and sellers, newspapers are all over
it and some new contracts are being concluded at parity with oil at
US$20/mmbtu. Japanese have only one other option besides Indonesian gas - spot
cargos from Qatar.
Snippets:
Corruption case on LNG price contract
– LNG from Tangguh is priced at US$3.3/mmbtu for export to Fujian in 2002, vs.
current
market price of US$20. Roy Janis, ex-head of PDI-P, said deal making was
confined to a small number of officials. Energy minister Purnomo Yusgiantoro
and ex-trade minister Rini Soemarno was involved. The team was led by Taufik
Kiemas, who was not in a position to lead an executive team being part of
legislation team.
Best regards
Verdi
Budiman
Indonesia equity
sales - Macquarie
+6221
515-1555
