During our visit to Medco Energi Internasional (MEDC) yesterday, we focused on the commercialization issue of its seven major projects both domestically and abroad. Road blocks are timely negotiations with the country’s regulator or customer, M&A, change in exploration activity due to new discovery, and price of oil.
Of the seven major projects, only South Sumatra-based Singa gas field (MEDC: 74.1%) should contribute earnings this year thanks to a Gas Sales Agreement (GSA) signed on December 4, 2009, with Perusahaan Gas Negara (PGAS). MEDC will start gas supply, up to 50mmbtu, by mid-2010 at a price of US$4.3/mmcfd. We note Singa field was discovered in May 1997.
The Libya 47 Block (MEDC: 50%) may see oil reserves’ commercialization delay up to 2014 following: (1) Share acquisition of Verenex Energy by Libyan Government-owned entity; and (2) Wider exploration coverage owing to discovery of gas deposits (about one-third of the block’s estimated resources). This may bring potential upside of natural gas sales to the European market once the gas is commercialized.
The Rimau Enhanced Oil Recovery (EOR) project of 46mmboe now seems doable with price of crude oil at US$80 level. Still, MEDC may need pilot project running up to two years prior to starting the EOR project. Hence, this may commence operation from 2012-13 under assumption of: (a) A successful pilot project; and (b) Crude oil prices staying above US$70 per barrel.
On the gas front, development of gas prospective Block A (MEDC: 41.67%) is pending extension of a PSC contract which will expire on 2011 albeit a GSA with Pupuk Iskandar Muda and PLN at favorable prices of US$5.0/mmbtu and US$5.3/mmbtu, respectively. If the contract extension were to be granted this year, MEDC may need 12-24 months for project start up.
Larger gas field, Senoro (MEDC: 50%), is awaiting the Government’s final decision on its downstream project: the Donggi-Senoro LNG (DS LNG) as gas sales market is yet to be determined. According to MEDC, gas pricing for export is offered at US$6.16/mmbtu on the JCC of US$70/barrel. If decision were to be finalized this year, time of 2-3 years may be needed for developing the block and plant construction.
Lastly, the 330MW Sarulla geothermal power plant is fronting a price re-negotiation with PLN given rising project cost from below US$500mn to more than US$800m. The power plant may be constructed in three stages and each stage needs 24 months to complete.
All said, rewards from the seven major projects are timely albeit higher visibility of project. Valuation calls for 2010-11F PE of 10.3-6.5x while the share price upped 4.1% YTD versus JCI’s 13.9% - at a time when crude oil prices bounced back to pass US$80/barrel. Oil and gas prices may surprise FY10 earnings on the upside, with volume and projects’ commercialization delays on the downside.
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