Senoro project overhang
YTD average crude prices reached US$49.5/boe, while spot at US$70/boe as stockpiles drop unexpectedly and the dollar index continued its fall. These recent events will at least bring a positive impact for Medco despite falling production volumes. On the other hand, we are concerned on the developments of the Senoro project as there are still several difficult issues to be solve. We therefore downgraded our recommendation to Neutral from Buy, with a price target of Rp3,700/share as we apply a ! 20% disco unt to our upgraded DCF-based fair price (since we lower our risk free rate assumption of 9.5%) to around US$0.45/share or Rp4,640/share.
Capex pull down. In our recent chat with the company, it was mentioned that they may trim down its FY09F capex plan to around US$200-250mn from around US$370mn previously, as they will lower number of exploration in several blocks such as Simenggaris and Bangkanai, as well as Libya. Moreover, the company has not decided the exact amount yet, with the uncertainties still lingering on the Senoro project as well as contract extension ! for block A, Aceh.
Selling Kakap to fund capex… To help financing the capex, the company has also entered into a conditional share sale purchase agreement with Star Energy Holdings to sell its 25% participating interest in Kakap PSC. However, they have not disclosed the transaction value and will make an announcement in 15 July 2009, which is the signing date.
….as well as bonds issuance. Aside from selling Kakap, the company will also issue 2 series of bonds with total value of Rp1.5tn or around US$150mn to help further finance its capex. The bonds have 3-year and 5-year tenor with a fixed coupon rate of 13.4% and14.3%, respectively. We view that it would be sufficient to finance this year’s capex, particularly with current cash position.
Uncertainty over Senoro project. Currently, MEDC has not yet to reach an agreement with the government regarding Donggi-Senoro project. There are 3 issues which still need to be approved by the government; 1) seller appointment agreement and 2) plan of development, which both need an approval from BP Migas, and 3) Gas selling price, which should be approve by Ministry of Energy and Natural Resources. Other than that, the company should als! o guarant ee gas supply to the domestic market. We view that such problem may take some significant amount of time to solve, thus further delay is likely.
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