MEDC Closed Wells, Not So Well - BNI

Investment Highlights:
􀂄 We downgraded our view of MEDC from BUY to HOLD
􀂄 Libya's current project has been halted with all workers have been pulled out from the area
􀂄 MEDC is currently optimizing other projects focusing on areas of Senoro and Block A
􀂄 FY'10 net income increased by 331.9% YoY on the back of oil and gas price surge and sale of asset
􀂄 We foresee a flat growth in revenue and operating income estimates for FY'11 as revenue generators are generally the same to FY'10
􀂄 Upside potential may arise from gas sales
􀂄 Going forward, we foresee a higher financing need where MEDC's debt to equity will likely to rise

Libya's Political Unrest Impact
MEDC operates field in Area 47 southwest of Libya with its partner Libya Investment
Authority (LIA). MEDC has invested US$160mn on the block and obtained operatorship in the area replacing Verenex who sold their stake to Libya Investment Authority (LIA). MEDC secured the operatorship from the Libyan General People's Comittee (GPC) starting April 1st 2010 replacing Verenex Energy Area 47 Lybia (VEAL). GPC also granted a one year extension to the exploration period commencing the same date of the operatorship and has extended exploration period until 31 March 2011. Area 47 has gross contingent resources of 352 MMBOE, and as of Q3'10.
If situations were better with no political unrest, production would likely to be
ensued by 2014 where the project scope is 50-100 MBOPD production facilities with associated pipelines. 26 wells have been drilled comprising of 20 exploration wells and 6 appraisal wells. Successful exploration would produce in aggregate flow of 123,025 BOPD based on 17 explorations and 2 appraisal wells. Area 47 current project has been halted which all workers were pulled out from the area. The management does not see a significant financial loss due to possible destruction of assets in area 47 where all 26 wells have been safely plugged. In the case of possible government change in Libya, area 47 project is less likely to be taken away from MEDC as Libya government alone does not have the capacity or the capital to operate the project. When the time comes to production phase, area 47 will need US$800 million of capex where it will be split in half between Libya's National Oil Company (NOC) and the contractor consisting of MEDC and LIA.

Financial Performance of FY'10
MEDC posted an 331.9% YoY increase in net income in FY'10 on the back of oil and gas prices surge and non operating gain from the sale of asset of Tomori E&P Limited (TEL) to Mitsubishi Corp. Gross margin decreased to 30.9% in FY'10 from 34.3% in FY'09 whereas EBITDA Margin slightly increased to 23.9% in FY'10 from 23.2% in FY'09. Operating Margin surged to 12.3% in FY'10 from 10.8% in FY'09 where on the back of asset divestment, net margin increased significantly to 8.9% in FY'10 from 2.9% in FY'09. MEDC's return on equity managed to increase to 10.6% in FY'10 from 2.7% in FY'09, respectively. MEDC's average oil price surged 27% YoY from US$63.98/barrel in FY'09 to US$81.47/barrel in FY'10. Gas price also rose 20.2% from US$2.97/MMBTU in FY'09 to US$3.57/MMBTU in FY'10. Total sales volume total from oil and gas inched up to 57.24 MBOEPD in FY'10 from 52.82 MBOEPD in FY'09.

Valuation
We downgraded our view of MEDC from BUY to HOLD. Using an average longterm oil price of US$90/barrel, 11.32% WACC, 7.5% risk free rate and 9.0% market risk premium, we calculated 12M DCF-based target price per share of Rp 3,900. We see the real driver for the stock will be the ongoing production of new projects, which has so far expected not to start in 2011.