PGAS:Worry on PGAS-BPMigas relationship - Mandiri

Concern regarding the relationship has been lingering in our mind since January 2011 after BPMigas Chairman Priyono told PGAS to review its plan to build a floating LNG terminal in Belawan, North Sumatra, because the costs could exceed $300mn. Tempo magazine recently reported (April 17, 2011) BPMigas appointed Petrogas, a relatively inexperienced company, to supply gas to PLN from Petronas’s Bukit Tua field which has signed HoA with PGAS in November 2010, signifying the ‘cold’ relationship between BPMigas and PGAS. As BPMigas is the authority of domestic gas supply allocation, we worry that PGAS swap of Jambi Merang gas to Chevron will not result in the return of Conoco Phillips supply. We think the market is still under-estimating the concern. We reduce our target price from Rp5,260 to Rp4,910 on concern of limited supply.

Q1-11 will see a lower distribution volume. PGAS indicated that Conoco Phillips (CoPhi) supply in Q1-11 was around 300 MMSCFD, less than 320-350 MMSCFD in Q4-10, therefore PGAS distribution volume could fall from 833 MMSCFD in Q4-10 to less than 800 MMSCFD in Q1-11. Pertamina Jambi Merang field which has started its supply of 20 MMSCFD to Chevron is expected to bring back PGAS CoPhi’s supply which is currently being diverted to Chevron. However, we have a concern (besides, if I am CoPhi, I will try to keep the flow to Chevron, as Chevron paid three times higher than PGAS), especially if BPMigas, pressured to increase oil lifting, maintaining the CoPhi allocation to Chevron.

To make matters worse, PGAS relationship with BPMigas is relatively ‘cold’ (in our view). An interesting story in The Tempo magazine highlighted the relationship. The report depicts the competition to supply PLN’s Gresik power plant. PGAS which already signed Heads of Agreement (HoA) with Petronas Carigali suddenly find its agreement cancelled, and BPMigas allocated the supply to Petrogas, a relatively new company owned by East Java regional government. The loss of PGAS opportunity is approximately 70 MMSCFD. It is not the first time that BPMigas made a decision which disadvantages PGAS. In January 2011, Priyono was reported to ask PGAS to reconsider its North Sumatra’s FSRU in favor of using unused LNG storage units in Arun, Aceh. As it needs around 300km of pipeline from Aceh to Sumatra, the plan itself looks unreasonable.

The uphill task of obtaining gas supply. With BPMigas unfavorable attitude, and its authority to allocate the gas supply, we see PGAS facing an uphill battle to obtain new supply. With gas usage priority given to fertilizer industry and PLN, we fear PGAS will have flat supply growth. We think the market is still underestimating the concern, with consensus projecting PGAS operating profit to grow yoy 9.7% and 8.9% in FY11, and FY12. As the market still needs to adjust its expectation, we see limited catalysts. Our FY11F and FY12F earnings estimates are 8.1%, and 19.3% discount to the estimates consensus. We downgraded our target price to reflect the supply concerns.