MEDC:Down the drain - Mandiri Sekuritas

Libya has almost turned into a war zone. Guns, bombs, and tanks have been deployed to confront protesters, while oil investors, including Medco Energi (MEDC), began to halt their operations in the oil-rich country and sent their expatriate staffs out of the country. We are concerned with MEDC’s Block 47 future development which may go nowhere if civil war finally erupts and transition to the new government, if any, is not smooth. What may be worse is a threat from total loss of the assets through civil pillage or nationalization. Even if those threats are hard to estimate, we took a conservative stance by taking out the Block 47 from our estimate, resulted in a decline in our 2014 earnings forecast (-41.5%). While awaiting clarity in the geopolitical crisis, we downgraded MEDC to Neutral.

High uncertainty in Libya. Following recent turbulence in Libya, many oil producers, such as BP, Royal Dutch Shell, and also MEDC have halted their operations. MEDC earlier maintained operations since the initial anti-government movement site was significantly far from MEDC’s Block 47 (Benghazi City: ±590km from Block 47). Yet, as the unrests quickly spread close to Tripoli (±190km), it was wiser for MEDC to close down all exploration activities for unforeseeable future while at the same time, requested Libyan military to protect MEDC’s assets in Block 47 (US$175mn or 21% of MEDC’s total oil and gas assets). This clearly takes some of the luster off MEDC’s prospects although the impact is less compared wit h produci ng blocks.

Worst case scenario: no output from Libya. We think that Libya crisis will not be resolved soon as Gaddafi vowed to keep his throne and his son Saif al-Islam warned of a civil war. Civil war is clearly is in plain sight. What happens if it occurred continuously is that there will be a total shutdown in oil and gas activities, including MEDC’s. Moreover, if the military personnel guarding MEDC’s assets are outnumbered; there is likelihood those assets will be looted. If protesters finally triumph and a new government is assembled, rugged transition may hamper any furthe r contra ct development (exploration expires at 31Mar11) and may raise nationalization peril. Thus, we turn up with a conservative stance where Libya Block 47 is totally off for good which will lower MEDC’s expected cash flow 2014 onwards. With this exclusion, our revenue and net income forecast in 2014 declined significantly by 23.6% and 41.5% from our previous forecast.

Downgrade to Neutral. Due to the high uncertainties in Libya which may bring severe drawbacks on MEDC’s earnings outlook from the Block 47, we downgraded our recommendation to Neutral for the mean time with TP of Rp3,200. We apply our most conservative assumption where no revenue will be generated from Libya Block 47 in 2014 onwards. MEDC is currently traded at EV/2P US$5.7/boe, PER 11F 19.3x, and PBV 11F 1.4x.