JP Morgan - PGAS: unsuspected turn on newsflow

(1) Energy ministry Darwin Zahedy Saleh has instructed ConocoPhillips South Sumatra field to allocate more gas to Chevron (at the expense of PGAS). Per contract, Chevron should get 322mmscfd allocation from Conoco. But as the government wants Chevron to ramp up oil production (Chevron uses natural gas for lifting its oil), the energy ministry wants Chevron to get 50-100mmscfd more. (Source: Tempo Interaktif)

(2) CEO Hendi Prio Santoso told Bloomberg reporter that natural gas sales may drop this year because of supply shortage from ConocoPhillips South Sumatra field. Delivery from that gas field dropped to as low as 150mmscfd this month, and may average at 250 mmscfd, less than the contracted 390mmscfd. (Source: Bloomberg)

(3) PGAS issued a public statement after market close, saying: (i) the company is keeping its volume guidance for 2010, namely 800-900 mmscfd daily average for the year. (ii) the company is discussing with the government on how to maintain the delivery from South Sumatera Gas Fields in the level that we received in January of this year, which was more than 370 mmscfd average for the month. (iii) the company has communicated the plan to hike price to the industrial customers, nationwide. Based on feedback, they will decide on implementation in 2Q10.

The good news: the price hike plan seems intact with potential increase in base price and surcharge fee, along with potential cut in customers' quota (for base price).

The not-so-good news: although overall "volume" guidance for PGAS remains intact, the company could be earning less than US$0.50/mmscf (just transmission toll-fee) for the Conoco gas that is being routed to Chevron (50-100mmscfd out of 855mmscfd forecast for FY10), vs. the forecast US$3.36/mmscf gross margin if the gas were sold to industrial customers. At this point, we do not know (1) whether this is a permanent re-allocation for Conoco gas, (2) if non-permanent, how long will this last, and (3) whether the government (or Chevron) will compensate PGAS for the potential loss in profit, from missing the contractual obligation.