Indopremier ENRG - BUY TP Rp 520 Acquiring More Power

10% Acquisition in Masela PSC Block
ENRG’s subsidiary, PT EMP Energi Indonesia, has signed an agreement with INPEX Masela, Ltd (an affiliate of INPEX Corporation) to acquire 10% participating interest in the Masela PSC Block located in Arafura Sea, Indonesia (subject to approval by the government). Masela Block PSC has an area of 3,221 km2 in a water depth ranging from 300-1,000 meters, and with initial estimated reserves of 13.65TCF, it has the second biggest new gas reserves in Indonesia after Tangguh’s Berau Block. The additional 227.5 mmboe of net reserves to ENRG will double the size of the current total estimated FY09 net 2P reserves of 224 mmboe, and offers a large supply to support future production in the block (around 50 years in our calculation if production rate stays constant).

To Add Significant Contributions
Having obtained the plan of development from the government, the Abadi field in Masela PSC is expected to produce 4.5 million tons per year (Mtpy) of LNG and 13,000 bopd of oil condensate starting 2016, using the Floating liquified Natural Gas (FLNG) technology. This will provide significant contributions to ENRG’s production by adding 474,500 barrels of net oil production or 14% to our FY16 net oil production forecast of 3.4mmbo. The 4.5 million tpa of LNG production translates to 630 mmcfd, adding 22,995mmcf of net gas production or 19% of our FY16 forecast of 120,428mmcf. There is potential for higher production ahead as the estimated field reserves facilitate production up to 9 Mtpy.

Price and Equity Funding is Key
While the acquisition cost is still undisclosed, if we assume ENRG pays $2/boe for its share of net reserves of 227.5 mmboe, the cost will reach $455mn. In this situation, we believe that equity funding is the only fitting solution to fund the acquisition since using more debt is unfeasible given ENRG’s low interest coverage of 0.06x by 1H09. ENRG is reportedly planning a rights issue of $500mn in this year, which will just be enough to pay for the estimated acquisition cost and leaving almost no room to restructure the debts that have been a burden to its earnings. Therefore, the price and success of the rights issue will determine ENRG’s future performance.

Valuation
In the absence of more information regarding the cost of the acquisition, the pricing of the LNG scheme and the rights issue arrangement, we have not factored in the 10% interest in Masela PSC. However, we view the acquisition positively given the size of the reserves and the large potential contributions. We currently rate ENRG with a BUY recommendation. Our TP of Rp520 represents 60% potential upside and implies 1.28x FY10F PBV and FY10F $7.11EV/mmboe (based on estimated 212mmboe net 2P reserves in FY10).