Danareksa Energi Mega Persada (ENRG IJ, Rp310 BUY) Strong Production Growth

Weak financial results but strong production growth
The company’s financial performance was weak in 1H09 and revenues fell 21.1% yoy to Rp701.6bn as the realized oil price slumped 52.7% yoy to an average of $51.9/bbl from $109.7/bbl in the same period last year. As a result, the company fell into the red, recording a net loss of Rp244.7bn. As for earnings before tax, they were also affected by higher financing costs due to the company’s US$450 debt raising efforts last year. Yet all is not bad. Despite lower capex, EMP will still be able to increase production volume in 2009. As the operator of its assets, gross production was boosted 18.8% yoy in 1H09 (note that production volume for MedcoEnergi fell 17.0% yoy in 1H09). And going forward, EMP should start to gain momentum as gas from the Kangean block starts to be monetized in 4Q10, giving a timely boost to earnings in 2010, which we expect to reach Rp201.9bn. Production growth should continue and we expect 19.6% growth in 2010 to 37.1 mboepd from an estimated 31.0 mboepd in 2009.

Better outlook for oil price
We increase our oil price assumption to take into account the latest oil price developments. Our oil price assumptions are now US$57/b (from US$55/b) for 2009, US$62/b (from US$60/b) for 2010 and US$70/b (from US$60/b) for 2011 onward.

Gearing to decline starting 2010
We expect EMP’s debt to equity ratio to increase to 1.8x at YE09 from 0.70x at YE08, yet still way below the 4.5x level at YE05 when the company acquiring huge reserves from Kangean. Looking further ahead, we expect the gearing to drop to 1.5x at YE11 and then to 1.3x at YE12, on the expectation of higher oil prices and an increase in production volume.

New TP at Rp 425, BUY
Although we now expect the company to book losses of Rp257.9bn in FY09 (vs. our earlier forecast of net profits of Rp297.5bn), the company should be back in the black in 2010. For FY10, we forecast earnings of Rp201.9bn or down from our earlier forecast of Rp250.8bn, mainly due to higher forecast production costs. Also, we have now opted to value the company based on its free cash flow to the firm (FCFF), as this better reflects the company’s current high leverage. In addition, we also apply a higher cost of equity of 22% (vs. 20% previously) to capture the higher risk of E&P activities from new exploration assets. This pushes up our WACC to 14.7% from 13.6% previously. Our new TP of Rp425 reflects P/BV of 1.8x and 1.7x in FY09-10F. Potential upside from the current share price is 37.1%. BUY.