Energi Mega
Persada
Realising its potential
Well diversified
assets
Energi Mega Persada (EMP) has well
diversified oil and gas assets. In 2008, oil production declined. But revenues
from oil production still grew71% on the back of significantly higher crude oil
prices. Going forward, however, EMP is focusing more on gas production for
which
it has new GSA agreements. The problem in the past has been that EMP has tended
to build up its assets without monetizing them. But now things are starting to
change. For FY09F, we forecast the company’s oil sales to decline 3.7% to
Rp1,462bn. Its sales of gas, however, are expected to shoot up 72.0% to
Rp839bn.
Now is the time
for EMP to better monetize its assets
EMP has an excellent track record in
growing its assets. Indeed, it has managed to grow its assets fivefold from
58mmboe at the beginning of 2004 (when it went public) to 363mmboe by the end
of
2008. This thirst for assets is also reflected in the increase in the Reserves
to Production ratio. It rose to 43.9x at YE07 from 33.5x at YE04 as the company
increased its reserves by acquiring new assets. Since 2007 the ratio has been
declining, and we expect it to continue declining as production picks up
following years of weak production (note that in FY04-FY08 production declined
by 2% CAGR). By YE09, we forecast the Reserves to Production ratio to decline
to
31.3x.
Kangean is the
jewel in the crown
EMP’s most important asset is
undoubtedly the huge Kangean gas block, located to the northeast of East Java .
Kangean represents some 67% of the company’s total assets and it accounted for
a
sizeable 28% of the company’s total production volume in FY08. Looking ahead,
Kangean is key to the company’s fortunes. And if EMP can monetize these huge
gas
reserves, then technical problems notwithstanding, we expect Kangean to drive
up
the company’s valuation as higher production shall lead to significantly
improved cash flow in the years to come.
Upside
potential
We derive the value of the company’s
assets (we only include the 2P reserves) by applying a WACC of 12.1% and
discounting the free cash flow over the contractual period of the assets.
Kangean accounts for a significant 62% of EMP’s enterprise value. As our TP of
Rp581 offers 24.9% upside to the current share price, we place a BUY
recommendation on the stock. Note also that we assume a conservative oil price
of only US$55/barrel in our forecast and higher oil prices would offer further
upside potential to the share price.
Lisa
Yulianingrum
(62-21) 350 9888 ext.
3512
li...@danareksa.com
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