Mandiri Sekuritas MEDC: Ramping up reserves

Medco’s 2P reserves were up to 265mmboe in FY09 (from 183mmboe in FY08), as they have converted some 119mmboe in the Senoro gas field from contingent reserves. This lowered MEDC’s EV/2P valuation to US$3.5/boe. Besides that, Libya & Block A reserves of 176mmboe and 22mmboe will soon to be classified as 2P once they get the approval from NOC and the government. Once transferred, these will double their 2P reserves. Furthermore, MEDC have received the green light from GPC to further continue their exploration period. This brought a positive sentiment to MEDC. We upgrade our recommendation to Buy with a target price of Rp3,500/share, from Neutral.

Higher reserves as per FY09... MEDC have converted their Senoro Toili gas field contingent reserves to 2P in 2009. Note that the 2P reserves are around 119mmboe. This increases MEDC’s FY09 2P reserves to 265mmboe (+44.8% yoy). This lowered MEDC’s EV/2P valuation to currently US$3.5/boe.

… and plenty more to come. Aside from that, they are also in a process to convert the remaining contingent reserves such as Libya, Area 47 and Block A, Aceh of 176mmboe and 22mmboe, respectively. For Block A, MEDC are awaiting the PSC extension from the government. Note that there will be no major capex before the final investment decision is made. ! As for th e Libya asset, Great Socialist People Libyan Arab Jamahiriya – General People’s Committee (GPC) has been given a 1-year extension on the exploration period, starting April 2010. This means MEDC could drill 3 more exploration wells, thus will improve their chances to obtain commercialization approval from NOC. Once they get the approval, MEDC could convert their contingent reserves to 2P reserves. This would reflect EV/2P reserves of US$2.0/boe.

Upgrade to Buy. Despite lower-than-expected FY09 results, the above factors would bring positive impact on MEDC, after several project delays have dogged MEDC’s share price for some time. We also rolled over our DCF-calculation basis to 2010. This resulted in higher fair price of Rp3,500/share from Rp2,650/share. We assume average oil price in 2010 of US$70/bbl (vs average YTD of US$79/bbl). Currently MEDC is trading at EV/2P reserves of US$3.5/boe.