Mandiri Sekuritas PGAS - Supply cut : bad in the short term, good in the long run

On Friday, 19 March 2010, the government came with a short- term solution for PGAS supply shortage. Post solution, PGAS will still face a shortage of 90 MMSCFD from the contracted amount or 10% from our FY09 estimates. PGAS, however, will increase its gas price by 15% starting April 1, 2010, earlier than our estimate of 10% from June 2010. Net impact will be a 6.! 5%, and 1.1% reduction in 2010 and 2011 net income, respectively. The new forecasts are based on 825 MMSCFD and 850 MMSCFD, distributed gas flow in 2010, 2011, respectively. This and a 5% p.a. increase in price from 2012 raises our DCF valuation from Rp4,350/share to Rp4,650 share. However, the upside from the current price is moderate and news flow post tariff increase will be subdued, hence we downgraded our recommendation to Neutral. At Rp4,100/share, PGAS is trading at 19.3x and 18.1x PER2010F, and PER2011F, respectively, a premium to the current market 2010F PER of 13.9x.

Net tally a deficit of 90 MMSCFD, to be partially compensated by 15% price increase. PGAS lost 205 MMSCFD, 65 MMSCFD from ONWJ is lost due to contract expiration, and 140 MMSCFD due to the delivery shortage from Conoco Phillips (CP). Recent mini-cabinet meeting discussing the supply shortage, came with short-term solutions. The solution is the extension of 25 MMSCFD ONWJ until June 2010, and an effort to boost CP delivery to 290 MMCFD (from 390 MMSCFD contracted), plus 50 MMSCFD from the new Medco’s Singa field. Thus total net deficit is 90 MMSCFD. PGAS will also cancel its plan to cut gas for industry by 20% and the stiff penalty for customers’ overuse of gas from the allocated amount, deficit will be burdened by PLN, state electricity company through reduced PGAS’s supply.

No end to shortage until PGAS finds new supply. Without any new supply from new gas fields such as the Suban III from Conoco Phillips, and floating storage regasification terminal (FSRT), the problem will linger. The good thing from the incident is the pressure for the government to focus on domestic gas demand and the understanding from the consumer to adjust prices to levels which will encourage gas producers to invest. These we think are the long term ! benefit f or PGAS.

Limited catalysts prompted a Neutral downgrade recommendation. Post announcement of tariff increase, we see limited catalysts for Perusahaan Gas. Despite improvement in DCF due to tariff adjustments, risk of supply also will increase due to rising demand for other uses, reducing leverage for PGAS to bargain with gas producers. PGAS will need government support to win new supply such as Suban III and complete the FSRT projects.