Senoro selling price rejected: Bisnis Indonesia published an article today mentioning that the Government of Indonesia (GOI) has rejected the US$2.7/MMbtu gas pricing of Senoro. Upon inquiry, MEDC informed us that it is the Parliament, not the GOI that raised its objection on the gas selling price. The reason cited by the article is that the selling price is too low and GOI would like to have US$3.8/MMbtu.
GOI has yet to approve: The article also quoted that the Director General of Oil & Gas: Ms. Evita Herawati, mentioned that the Indonesia government is still waiting for the Senoro consortium to sort out the six conditions given to the consortium before deciding on the gas price. Currently, the government has yet to approve the contracted gas price.
The 6 conditions: The six conditions given are: (1) Revision of gas selling price in relation to Japan Crude Cocktail. (2) Revision to the development plan. (3) Revision to shareholders agreement. (4) Guaranteed gas supply to the domestic market. (5) Clarification on unhealthy competition. (6) Reasons why choosing the downstream
project.
Further delay likely: With these new developments, we view that further delay to Senoro development is likely: (1) It will take time to fulfill the six requirements given by the government. (2) Time will be needed to sort out the gas selling price so that every parties involved is satisfied.
ST downside likely: Fortunately, we have incorporated potential delay in Senoro in our model in which we pushed back the development by 2 years compared to the company's guidance. For Senoro, we assume that the project will be completed by FY15 rather than FY13 as guided by MEDC. With these, we view short term downside to MEDC share price is likely. However, we believe the long term fundamental of MEDC is
still intact.
Maintain OW and Dec-09 PT of Rp3,200: Due to its LT potentials, we maintain OW and our SOTP based Dec-09 PT of Rp3,200. Our PT is derived from the sum of the DCF of MEDC’s individual projects (riskfree rate of 13.0%, equity risk premium of 5.5% and a terminal growth rate of 7.0%). We also incorporate a 20% discount to the NPV value to account for further delays in MEDC’s projects.
Risks to our PT are: (1)execution risk: future project delays, etc, and (2) a decline in oil price and operating performance.
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