Secure operatorship in Libya: Recently, Libya’s General People’s Committee named MEDC as the operator of Area 47 in Libya; replacing Verenex. This announcement in our view increases the likelihood of the project being developed as its partner: Libya Investment Authority does not have the experience in developing oil fields.
• Positive share price drivers: (1) Rising oil price to boost profitability in FY10E. (2) New and higher gas flow from Lematang and Kramasan. (3) Low base in profit during FY09. (4) Upside from progress on Libya and Senoro. Negative share price drivers: (1) Declining oil production on existing field. (2) Execution risk – projects delay.
• Production decline: In FY09, MEDC’s oil lifting declined by 22.3% from 45,000 bopd in FY08 to 35,000 bopd. Part of this is due to the decline in production (10%) and divestment of Yapen PSC. With that, we incorporate a decline of 10% into our model of MEDC oil production in FY10E. For gas, the production is fairly stable at 104.3MMScfd: decline of 3.5% Y/Y. Going forward, we incorporate the new supply of
Lematang and Keramasan totaling 70MMScfd into our model. Lower oil production recorded in FY09 translates to lower than expected results. With that, we lower our FY10E earnings by 37.7%.
• Valuation and price target: We revisit our model and incorporate the following adjustments: (1) New oil price assumption. (2) Decline in oil production. (3) Lower than expected FY09 results. The adjustments yield us a new PT of Rp3,300, representing 26.5x FY10E PE. We rate the stock OW on rising Y/Y profit due to higher oil price. (risk free rate = 10%, equity risk premium = 5.5%, terminal growth =5.5%).
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