PGAS Outstanding opportunity - BoA Merrill Lynch

Recent share-price correction - an outstanding opportunity
PGAS’ share price has corrected by 16% in the past three weeks, which we believe is primarily due to investor concerns/market speculation/competitor research over a potential volume cut for PGAS in 2011 – given fears that gas from Conoco to Chevron will no longer be re-routed to PGAS. We spoke with PGAS management and confirmed that;
1. Even without Chevron gas, PGAS should still deliver 30mmscfd of volume growth that will come from Medco Lematang (ramping up to 70mmscfd) and Husky (to flow 20mmscfd in 2H) from 2010 level of 823mmscfd.
2. With Chevron gas, PGAS could see an additional volume increase of 75-80mmscfd in 2H on top of 30mmscfd of existing volume ramp-up (point #1).
3. By contract, Chevron gas should be re-routed to PGAS after Chevron obtains gas from Jambi Merang. However, nothing is 100% confirmed to date as Jambi Merang gas hasn’t started flowing to Chevron yet.

Reiterating Buy & Rp5,050 PO on PGAS
1. At 11.4x 2011E P/E and 7% dividend yield, PGAS offers a compelling valuation, in our view. At the current share price, the market seems to already be factoring in lower volume growth expectations for 2011.
2. We view the current share price as a safe entry point to invest in PGAS’ upside potential. That includes the commissioning of LNG receiving terminal and signing of more gas supply, both for LNG receiving terminal and piped gas. LNG West Java receiving terminal is now going ahead with Golar as FSRU provider and Rekayasa Industri as pipeline contractor. PGAS is now negotiating with Semprea for LNG supply, waiting for 50mmscfd of gas from Petronas to be upgraded from HoA and eyeing for at least 100mmscfd of gas contract from East Java regional government.
3. We maintain our Buy rating and PO of Rp5,050 (42% upside potential).