Macquarie Medco Energi – why the stock underperforming badly

Despite its dirt cheap valuation (EV to 2P reserves of around US$1/bbl), the stock has lagged the broader market on a retail buying day. The stock is trading lower now at Rp2,575 when oil is around US$50, compared to the Rp3,600 share price level in Jan-07 when oil was at the same level. I met with the company recently to identify the problem areas, and to see whether we could see any lights at the end of the tunnel. The answer is no, not quite. Key issues:

1. Lybia deal has not been closed to date. China National Petroleum Corp’s (CNPC) offer to buy Verenex, 50% partner in Medco’s Lybia project, that suppose to show the under-valuation of Medco shares and promise development capital, has not been approved by Lybian government. The offer period has expired but CNPC has not said anything thus far.

2. Senoro LNG project showing limited progress. The gas sales agreement (GSA) needs a selling agency agreement (SAA) from the Indo gov’t. The minister of energy Mr. Purnomo is unwilling to issue the SAA without approval from House of Representative, and the House thinks the agreed gas price formula is too low. In the end, this could be a political issue. Election and power struggle among political parties may have something to do with the delay. No one understands how the changing political landscape may affect Medco.

3. Debts maturing in the very near term. It has a US$220mn convertible bonds that will likely be redeemed on 12 May 2009. It has a Rp1.18trn (US$107mn) Rp bonds maturing on 12 June 2009. Per Dec ’08, Medco shows a cash position of US$350mn and a short term investment of US$173mn. The company has set aside the cash for the CB redemption, while looking to refinance the Rp bonds with another bond issue. But the company’s 2009-10 capex program is being reviewed, with around US$100mn per year committed capex for those two years. Note that redemption of the CB will release a 6.7% stake in Medco as treasury shares, adding the treasury shares available for sale to 11.7%.

4. No asset sale since October 2008. Medco sold Apexindo in Sep-08 and Tuban oil block in Oct-08, but since then the asset sale program has showed no progress. The company has been looking to sell 4 other blocks Kakap, Bawean, Lematang, and Langsa for some time now.

Before there is any progress on any of the above issues, the stock may continue to face strong headwinds despite being under-owned by institutional investors.