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PT Energi Mega Persada tbk

BUY
Initiating Coverage PT Energi Mega Persada Tbk

January 27, 2011 Unlocking Potential


Oil price roars to the pre-crisis level
Sector : Oil and Gas
By the end of 2010 the Nymex Crude Oil price closed at 91.38 dollar per
Last Price Rp109
barrel, a level we have not seen since the Lehman Brothers collapsed.
PT Energi Mega Persada Tbk Surging demand of oil from emerging market has pushed the energy
Code : ENRG inventory level shrink and push up the price of the black gold commodity
Recommendation: higher. Now, as the economy revives stronger from the global crisis,
Indonesia as one of potential to become a giant economy now in full
BUY TP: 380 throttle to spend in manufacturing and of course unlocking their
Upside: 245% abundant energy potential such as natural gas.
Valuation:
DCF Huge Off-shore resources awaing to be exploited

Indonesia has total around 171.3 trillion cubic proven gas which much of
them not in the production phase yet. The next huge project that
expected to produce is Masela Block, which located in Maluku Province,
that estimated hold reserve up to 18.5 TCF. The Block licensed to
Inpex, which sell 10 percent of its stake to an Indonesian private oil and
gas company (PT Energi Mega Persada Tbk).

Finally delivered

PT Energi Mega Persada tbk (EMP) as one of the largest energy


producers in Indonesia holds huge untapped resources with Masela block
is its latest venture. After being delay by financial crisis, we believe
Source : Metastock EMP’s large projects will come on stream soon. We expect the company
will produce nett 20,260 and 41,280 barrel of oil equivalent per day in
Stock Data the next two year (2011 & 2012) from current production, which is
Market Cap. (in RpBn) 4,424 around 13,000 barrel of oil equivalent per day. We also assume
Market Cap. (in USDMn) 491,519 company’s ASP will stay above 90 dollar per barrel as the pressure of
inflation will stay in the coming years.
Share Outstanding (million) 40,584
Free Float (%) 76% Valuation, BUY 12-month Target Price IDR 380
52w Range 75-178
We initiate Energi Mega Persada Tbk (ENRG) with BUY recommendation
and 12 months target price at IDR 380, we came out the price by using
DCF valuation. ENRG currently trading on 71% discount to our TP.
Key Indicators Additional risks to our view include :1) volatility of oil price which might
FY09A FY10E FY11E result in under forecast, 2) delayed on project at Kangean and Bentu
ROE, % -99% -2% 5% Blocks, 3) any future possible change in accounting treatment as a result
PER, x -1.6 -46.7 13.0 of new oil and gas industry law which expected to be out this year.
PBV, x 1.6 0.7 0.7
EBITDA Margin, % 0% 0% 0%
EV/EBITDA 50.2 76.4 10.3 Financial Summary 2008 2009 2010F 2011F 2012F 2013F

DER, (x) 4.9 1.0 0.6 Revenue (Rp Bn) 1,859 1,444 1,210 2,114 3,952 4,332
EPS Growth, % -4849% 95% 460% Operating profit (Rp bn) 583 27 155 698 1,845 1,983

Source: Company, WSI Research Net Income (Rp bn) -35 -1729 -95 407 1349 1564
EPS (Rp) (2) (120) (2) 10 33 39
PE (x) -34.62 -1.61 -46.74 10.88 3.28 2.83
Analyst PBV (x) 0.33 1.60 0.71 0.66 0.55 0.46
DER (x) 2.39 4.87 0.61 0.69 0.63 0.57
Jemmy Paul W
jemmy@waterfront.co.id ROE (%) -0.9% -99.3% -1.5% 6.1% 16.8% 16.3%
Source: Company, Waterfront Research
Tel: (021) 529 21166

27 January 2011 www. waterfrontsecurities.co 1


PT Energi Mega Persada tbk

Oil price roars to the pre-crisis level


By the end of 2010 the Nymex Crude Oil price closed at 91.38 dollar per barrel, a level we have not
seen since the Lehman Brothers collapsed. As the surging demand of oil from emerging market has
pushed the energy inventory level shrank. That result to a surge in price of the black gold commodity
higher. Global Manufacturing Indexes across the globe has been recovering from the slump that
caused by late financial crisis on western countries. Higher cost of production as the inflationary effect
also boosts the price of oil. According to International Energy Agency (IEA), oil should reach above 70
dollar a barrel to reach a level that can attract more exploration and investment to find new oil and
gas fields. Indonesia, a net importer oil country is now struggling with the current price because of
burden of subsidizing energy to its people. Having know as on oil giant producer at the 80s, the
country now only depend more to its gas production. Although being just number 12 in holding gas
reserves in the world according to World Fact Book, the country has become the eighth largest natural
gas exporter in the world. It is not because of its abundant gas resources, but because the lack of
speed for using natural gas as an energy source for its domestic consumption. As the economy revives
stronger from the global crisis, Indonesia now is in full throttle to spend in manufacturing and of
course unlocking their abundant energy potential such as gas.

Figure 1. Indonesian Crude Price (ICP) chart

Source: US Energy Information Administration

Figure 2. Rank of Countries as Largest Natural Gas Exporter

Source: Wikipedia-World Fact Book

27 January 2011 www. waterfrontsecurities.co 2


PT Energi Mega Persada tbk

Figure 3. Rank of Country with Largest Natural Gas Proven Reserves

Source: Wikipedia-World Fact Book

Huge Off-shore resources awaing to be exploit

Indonesia has total around 171.3 trillion cubic gas proven which much of them not in the production
phase yet. Several issues has made the progress so slow. From the national interest to corruption
suspicion has made several largest blocks delayed its production. D-Alpha Block in Natuna, which
currently hold the largest reserve in Indonesia, is still in the join partnertship stage after the
government gave the operator right to National Petroleum Company (PERTAMINA) from the previous
licensed operator Exxon Mobile. The second largest (Tangguh Block) is now in production stage but
still not achieved production plan scheduled as it still behind schedule planned to deliver to their
customer. The other one is Donggi-Senoro Block which project being suspend because of corruption
issued and delayed because of the export portions that still negotiate. The next huge one is Masela
Block, which located in Maluku Province that estimated hold natural gas reserved up to 18.5 TCF. The
Block is licensed to Inpex, which sell 10 pct of its stake to Indonesian private Oil and gas company
which is PT Energi Mega Persada Tbk (EMP)

EMP as second largest oil and gas company in Indonesia with equity access

Significant role of oil and gas company in Indonesia is increasingly being attractive to investors due to
current oil price which promised huge gain through investment in that sector. Indonesia is a country
that dominates by its National Oil Company (NOC) that is PT Pertamina Persero is now in need for
equity access for investor to involve in this sector. EMP that currently hold second largest market
capitalization of public oil and gas company in Indonesia Stock Exchange (IDX) is a very undemanding
cheap valuation company which offer great potential of returns. EMP that currently hold 567 million
barrel oil equivalent (MBOE) 2P Reserves is a very cheap pick as it only trade at 1.58 times EV/2P
through our current estimate enterprise value. It is so much cheaper compare to its peer in Asia
Pacific regional, which trade around 5.1 times EV/2P. We believe that EMP will finally produce positive
bottom-line beginning this year as the realization of new oil and gas wells will increase its oil and gas
production by 43 % and 192% in 2011, 2012 respectively. A jump in oil price and realization of
higher ASP in its natural gas sales will start to effect this year. That will made the company revenue
soar up. A multiple growth in net income will be expected as a steady growth in cost of production in
the coming years cant be compare to multiple output in revenue.

27 January 2011 www. waterfrontsecurities.co 3


PT Energi Mega Persada tbk

EMP has 5 production blocks and 2 huge blocks expected come on stream

EMP hold production in 5 Blocks which produce around thirteen thousands barrel oil equivalent per day
last year. The contribution of its oil and gas production is almost the same. Unfortunately, due to
Sales Agreement that EMP hold in the past, the company is not making much dollar in the recent
natural gas price hike. EMP’s gas sales price is only 2.7 dollar per mmbtu on 2010. That price is
discounting about 40 percent from current gas price that traded in New York Mercantile Exchange. We
believe that lack of fortune will now evolve into profit since the company has renegotiated the current
price of gas delivery. We expect the company will improve its average gas-selling price by 34% and
112% to $3.52 /mmbtu and $5.57/mmbtu respectively in 2011 and 2012. The fortune will be double
as company will also book an increase on its oil average selling price to 91.7 dollar per barrel and 100
dollar per barrel according to our assumption in 2011 and 2012, compare to its current oil ASP around
79 dollar per barrel.

Figure 4. EMP Natural Gas Reserves and Indonesia Estimated Natural Gas Reserves

Source: Company, EM

Kangean and Bentu blocks is expected to double EMP production.

Early January 2011 EMP just announced that its wells from Pagerungan Utara in its Kangean Block
starting to produce around 6000 barrels per day. As it hold only 50% share on that block due to sales
of interest to its 2 partners we expect that company will get around 3000 barrells oil per day in its oil
production. That will means an increase for about 50 percent on its production. The block, which hold
most of the EMP reserves before the acquisition of 10 percent, Masela Block will also produce about
300 bbtud next year. That will made EMP output almost 4 fold jump than its current production in
2012. We expect the company will produce more than triple its revenue in 2012 after the production
coming on stream. Not just because of the amount it produce, but also from the adjustment of its
average selling price which will be as high as $5.57/mcf. In 2010 company has made adjustment of
the selling price with its existing buyers to revised 90 percent of its gas sales above $5/mcf. Since
most of its short term project is a long delayed project then we believe there will be no much delayed.
Gas pipeline already secured and the buyers already made commitment to purchase the output with
conditions agreement which profitable to EMP. The company now expecting an output around 25 bbtu
from its Bentu Block early this year. We also believe there will be no delayed on Bentu project as the
production plan scheduled to start in late 2010.

27 January 2011 www. waterfrontsecurities.co 4


PT Energi Mega Persada tbk

Figure 5. EMP Oil and Gas Assets

Source: Company, EMP

Masela acquisition.

On December 2010 EMP announced that its already sealed the transaction of buying 10 percent stake
in Masela Block, one of the largest natural gas block in Indonesia. The company bought the stake at
around 30 cents dolar per barrel oil equivalent. It means more than 90 percent discount compare to
market price of M&A oil and gas asset which around 4 dollar per barrell. Santos, an Australia gas
company which hold a block near Masela Block just sold its interest around that figure. The 10
percent Masela block acquisition will make the company 2P reserves jump 2.5 times. If the production
plans of Masela block coming on schedule at 2016 we will see company revenue jump 5 times
according to our model.

Figure 6. EMP after Masela acquisition

Source: Company, EMP

27 January 2011 www. waterfrontsecurities.co 5


PT Energi Mega Persada tbk

Bakrie Grup after Vallar deals

As a subsidiary of Bakrie group EMP has experience a very hard time during the financial crisis. We
believe crisis of cashflow is the problem that hit EMP the most. Lack of trust from financial institution
has made company cost of fund surge. That resulting a lack in its organic investment activities. We
believe that the company history of not meeting production plan scheduled in the past years is simply
cause by lack of funding. Since the right issue succeeded, we believe EMP will now meet their
production planned on schedule. The hike in price of oil, restructured gas ASP and exploding
production will made the company stronger. Recent parent company group with Vallar will also boost
company prudential and image in the eyes of investors. We expect company will success restructured
its debt with a less costly interest next year as the result of current financial performance.

Figure 7. EMP Oil Average Selling Price (ASP)

120

100
dollar per barrel oil

80

60

40

20

0
2008 2009 2010E 2011E 2012E

Source: Company, EMP, WSI Research

Figure 8. EMP Gas Average Selling Price (ASP)

5
US dollar per mmbtu

0
2008 2009 2010E 2011E 2012E

Source: Company, EMP, WSI Research

27 January 2011 www. waterfrontsecurities.co 6


PT Energi Mega Persada tbk

Valuation, BUY 12-month Target Price IDR 380

We initiate Energi Mega Persada Tbk (ENRG) with BUY recommendation and 12 months target price at
IDR 380, We came out the price by using DCF valuation. Another valuation using EV/2P reserves
might need to be consider because it still have huge discount compare to its peers in Asia Pacific. We
choose DCF valuation due to ENRG now becoming more in operation activity. ENRG currently trading
on 72% discount to our TP. Additional risks to our view include :1) volatility of oil price which might
result in under forecast, 2) delayed on project at Kangean and Bentu Blocks, 3) any future possible
change in accounting treatment as a result of new oil and gas industry law which expected to be out
this year.

Income Statements 2008 2009 2010F 2011F 2012F 2013F


in Billions of Rupiah
Total Revenue 1,859 1,444 1,210 2,114 3,952 4,332
Cost of Revenue, Total 1073 1261 970 1314 1984 2202
Gross Profit 786 184 240 800 1,967 2,130
Operating Expenses, Total 203 156 85 102 122 146
Operating Income 583 27 155 698 1845 1983
Interest Expense & Finance charge -739 -1396 -285 -250 -250 -250
Interest/investment income 134 0 0 88 192 340
Others 41 -49 0 0 0 0
Net Income Before Taxes 19 -1417 -130 536 1787 2073
Provision for Income Taxes 55 315 -32 134 447 518
Net Income After Taxes -35 -1729 -95 407 1349 1564
Minority Interest 2 3 3 4 8 9
Net Income -35 -1729 -95 407 1349 1564
Net Margin (%) -2% -120% -8% 19% 34% 36%
Number Of Shares Outstanding (mill) 14401 14401 40584 40584 40584 40584
Source: Company, Waterfront Research

Balance Sheets 2008 2009 2010F 2011F 2012F 2013F


in Billions of Rupiah
Cash and Equivalents 231 49 281 1854 2258 3297
Total Receivables 2145 1564 931 1232 1358 1814
Total Inventory 481 396 332 580 805 1189
Others current asset, Total 672 231 231 231 231 231
Total Current Assets 3528 2241 1775 3898 4652 6531
Property/Plant/Equipment, Total 6585 6105 5768 5393 6442 6472
Other Long Term Assets, Total 2513 1906 2587 1978 2028 2021
Total Assets 12627 10252 10130 11268 13123 15024
Accounts Payable 433 638 491 665 1004 1254
Other Current Liabilities 1135 3621 1271 1271 1271 1271
Long Term Debt 6692 3802 1664 2221 2388 2476
Other Liabilities, Total 620 417 417 417 417 417
Total Liabilities 8880 8478 3843 4574 5080 5418
Minority Interest 35 33 33 33 33 33
Common Stock 1440 1440 4058 4058 4058 4058
Additional Paid-in Capital 3355 3355 5344 5344 5344 5344
Retained Earnings -133 -1863 -1957 -1551 -202 1362
Other Stockholder Equity -950 -1191 -1191 -1191 -1191 -1191
Total Equity 3711 1741 6254 6661 8009 9573
Total Liabilities & Equities 12627 10252 10130 11268 13123 15024
Source: Company, Waterfront Research

Jemmy Paul Wawointana www. waterfrontsecurities.com 7


PT Energi Mega Persada tbk

Statement of Cashflow 2008 2009 2010F 2011F 2012F 2013F


in Billions of Rupiah
Net Income -35 -1729 -95 407 1349 1564
Depreciation 6692 3802 1329 1302 1302 1302
Change in Working Capital 620 417 318 -375 -11 -590
Net - CFFO 51 36 1552 1334 2639 2275
Chg. Property/Plant/Equipment 7327 -480 -337 -1414 -1385 -1229
Chg. Other Long Term Assets 3355 -607 -2991 -609 -850 -7
Net- CFFI -1267 -1823 -3328 -2023 -2235 -1236
Change in Long Term Liabilities 4775 -2890 -2687 557 167 88
Chg, Minority Interest 0 0 0 0 0 0
Chg. Equity 0 0 4513 0 0 0
Net - CFFE -737 1547 1826 2263 0 0
Net Cashflow -1953 -240 50 1573 404 1039
Cash at the Beginning 621 455 231 281 1854 2258
Cash at the End 231 49 281 1854 2258 3297
Source: Company, Waterfront Research

Financial Ratios 2008 2009 2010F 2011F 2012F 2013F


Profitabilitiy
ROA -0.3% -16.9% -0.8% 3.0% 8.2% 7.8%
ROE -0.9% -99.3% -1.5% 6.1% 16.8% 16.3%
Gross Margin 42% 13% 20% 38% 50% 49%
Ebitda Margin -1.9% -119.7% -7.8% 19.2% 34.1% 36.1%
Pre Tax Margin 1.0% -98.1% -10.7% 25.4% 45.2% 47.9%
Net Margin -1.9% -119.7% -7.8% 19.2% 34.1% 36.1%
Leverage
Total Debt/Assets 0.70 0.83 0.38 0.41 0.39 0.36
Total Debt/Equity 2.39 4.87 0.61 0.69 0.63 0.57
Net Gearing 68.5 82.2 19.5 6.8 -5.2 -20.6
Interest Coverage 0.03 -1.02 -0.45 2.15 7.15 8.29
Activity
Sales Growth 63% -22% -16% 75% 87% 10%
Net Profit Growth -343% -4849% 95% 530% 232% 16%
Valuation
Enterprise Value in bill 6756 5374 6720 5232 3121 -229
EV/Ebitda 7.83 50.23 55.79 6.65 1.50 (0.10)
EPS (2) (120) (2) 10 33 39
PE (x) -34.6 -1.6 -46.7 10.9 3.3 2.8
EV/Sales (x) 3.63 3.72 5.55 2.47 0.79 -0.05
BVPS 258 121 154 164 197 236
PBV 0.33 1.60 0.71 0.66 0.55 0.46
Dividen yield 0 0 0 0 0 0
Source Company: Waterfront Research

Key to Waterfront Investment Rating:


BUY = >15% upside potential, NEUTRAL = + 15% upside/downside, SELL = > 15% downside potential within 12 months period

Disclaimer:
This report is prepared strictly for private circulation only to clients of PT Waterfront Securities. It is purposed only to person having professional experience in matters relating to
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herein, and may have acted upon or used any of the recommendations herein before they have been provided to you. © PT Waterfront Securities 2011.

Jemmy Paul Wawointana www. waterfrontsecurities.com 8

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