MEDC: Replenishing time - Mandiri

Soaring oil prices aided Medco Energi’s (MEDC) performance in FY10, with revenue up to US$930mn, 118% of our and 110% of consensus estimates as ASP reached US$81.5/bbl. Net income was twice higher than our and consensus estimates due to gain from the Senoro asset divestment. In light of maturing fields, MEDC plans to push exploration drillings in 2011, focusing on its producing areas. On the other hand, MEDC’s explanation over Libya continuity convinced us to predict that infinite shutdown is very unlikely to occur, yet we prefer to be conservative. We maintain Neutral call on MEDC, while waiting for progress in Libya. Currently MEDC is traded at EV/2P (excluding Libya) US$5.5/boe.

Higher-than-expected earnings, underachieved operationally. MEDC recorded net income of US$83mn (+331.9% yoy) which was around 2x of our and consensus estimates, mainly due to gain on divestment of the Senoro project around US$250mn. Revenue rose to US$930mn (+39.2% yoy, +26% qoq), supported by significant jump in chemical sales to US$170mn (FY09: US$48mn). Operating income of US$114mn came below ours and consensus forecasts. MEDC’s oil lifting declined to 30.7 mbopd (-12.2% yoy) as Rimau block is maturing quite fast (±15% decline rate), while oil ASP rose to US$81.5/bbl (27.3% yoy). This implies increasing revenue was contributed mostly by ASP increase. As price trend is moving upward, we may see this as a catalyst for MEDC in 2011. On the other hand, gas played more important role as sales rose to 26.8 mmboe (+48.7% yoy).

Looking for more oil play. MEDC’s 2P reserve is declining to around 254 mmboe (-8.3% yoy) as the main producing blocks, namely Rimau and SCS, are maturing. In order to reload its reserves, MEDC plans to drill 13 exploration wells and 36 development wells in 2011, mostly around its producing blocks. Furthermore, we view Rimau EOR project in 2013 will also be essential for MEDC if we look at the current reserve profile. We also see MEDC still has potential inclusion from its large contingent resource of 217 mmboe, which is yet to be certified.

Uncertainty remains high in Libya. Post discussion with MEDC management, who is in charge for Libya, we got clear explanation about the situation there. As the Block 47 is still under exploration phase, there is only one exploration tool and potential damage, if any, would be minimum. However, we remain conservative on Libya outlook (no output) as such political insecurity deliver considerably high uncertainty for E&P players. MEDC has so far invested around US$175mn of assets, which means potential loss, we think, would be as much as that figures.

Maintain Neutral. As coalition started military intervention in Libya, which will likely prolong the conflict and until there is a positive update, we prefer maintaining our Neutral position (TP: Rp3,200) on MEDC. Currently MEDC is traded at EV/2P US$5.5/boe and PER 11F 16.7x.