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MEDCO ENERGI (MEDC IJ)...This is the high conviction idea from the sales
desk. Medco is probably one of the most undervalued oil and gas play (in terms
of reserves) in the region. The stock has been a massive laggard in the oil
and gas space for a combination of reasons.
Mike Chambers and Eugene Chung wrote the following:
1, Its current Indonesia oil and gas production has peaked and declining
making current earnings multiplies unattractive.
2, There has been continue disappointment on monetizing their gas assets
(mainly Senoro gas in Sulawesi) by building a LNG facility.
3, Association of the Lapindo blowout where Medco has 32% working interest
(Energi Mega is the operator). Medco has divested the stake and relinquished
of possible liabilities.
However, a number of recent developments lead us to believe the stock is
about to re-rate through divestment and value recognition of their key
non-producing assets.
Divestment:
1, Mgmt is looking to divest their 51% stake in oil service company Apexindo
(APEX IJ) worth around US$400m. Already invited bids and transaction should be
complete by 1Q08.
2, Divestment of a number if non operating stakes in Indonesia oil fields
could. Expect to raise US450-500m.
What does this mean?
Current market cap of Medco is US$1.5bn. Take out valuation of divestment.
You are paying US$500m for 150m boe of 1P reserves (483m boe of 2P) = less than
US$4 per barrel of 1P
But than, the most exciting and biggest upside comes from its two key assets.
1, Medco owns a 50% interest a oil field in Libya (Block 47). No sell side
analyst have attached a fair valuation to that asset due to the fact it is in
early exploration stage. However, recent 5 wells drilled shows a 100% hit
rate with very high flow rates. We understand that the oil field might contain
over 1bn barrels of oil. Note: The other 50% interest is owned by a Canadian
listed co Verenex (VNC CN). VNC is valued at US$500 and they do not own
anything other than the Libya prospects. Medco is looking to unlock their
value of Block 47 through a AIM listing in 2H08.
2, Senora gas field. Progress to build a LNG facility there (monetize the
gas reserves) has been disappointing. However, Mitsubishi (top contender to
build the project - Japanese biggest buyer of LNG from Indonesia) has recently
bought a 20% indirect stake of Medco through holding company Encore Energy
valuing Medco at Rp4,800/share. Why buy a 20% non-controlling stake in Medco
if you not intend to be partners? Once LNG deal is a go, GSA agreement will be
signed bringing another 120mboe to 1P reserves worth US$500.
Any angle you look at it. The stock is cheap with multiple catalyst for the
stock to re-rate.
Our back of the envelope SOTP valuation has a Tp of Rp6,500. BUY with 56%
upside (add another Rp1000/share if you include divestment of non-core indo
assets)
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