• It was reported yesterday that Conoco Philips is unable to meet its contracted gas supply volume to PGN. Supply from Conoco Philips’ Coridor Block in South Sumatera during Feb ’10 amounted to only 250-260 mmscfd and even briefly dropping as low as 150 mmscfd within this month. This figure was much lower than the contracted volume of 396 mmscfd and the Jan ’10 average volume of more than 370 mmscfd. PGN suspects the lower gas supply was due to a recent additional 80-100 mmscfd gas supply from Conoco to Chevron in order to lift Chevron’s oil lifting.
• As a result, PGN had to pass the gas supply shortage to its costumers, including cutting gas supply to PLTGU Muara Tawar by 50 mmscfd to only 180 mmscfd in this month. According to PLN’s management, PGN has pledged that gas supply cuts will only occurr until the end of this month.
• PGN’s management has responded to this issue, stating that the company and the government is still discussing how to maintain gas delivery from Conoco’s gas field at levels similar to received in Jan ’10 which was more than 370 mmscfd. In the meantime, PGN is still maintaining its volume guidance in 2010 which is 800-900 mmscfd.
• For now, we are still maintaining our distribution volume assumption at 882 mmscfd for 2010F and keeping an eye on progress of the supply shortage problem. There will be a downward adjustment to our assumption by 4-5% if PGN fails to resolve its supply shortage within the next 2 months, and might be expanded if the lower delivery
problem from Conoco continues longer.
• On another topic, PGN’s CEO, Mr.Hendi Prio Santoso, previously stated to the media that the company have not thought to increase gas price within this year. However later that day, in the company’s formal statement, the CEO altered by saying that the company has communicated their pricing adjustment scheme to their industrial costumer and will decide in 2nd quarter of this year.
• For this issue, we are still confident that PGN still has room and bargaining power to increase its gas selling price this year, backed by current tight supply condition and future higher cash cost for PGN. We also believe that the gas price increase will be well accepted as PGN’s costumers such as PLN and industries are willing to pay higher price to secure the gas supply.
• Overall, we see some downside risk on our distribution volume assumption as PGN is unlikely to solve the lower gas delivery in the near future and the possibility of new gas supply from other gas field is also improbable. On the other hand, this tight supply condition will grant PGN stronger pricing power and we are still confident that gas selling price increase is imminent. Maintain Buy on PGN TP 4450.
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