PGN Alert : KTA from recent meet; still lacking near-term catalyst

Although we reiterate our view that the stock lacks any clear positive catalysts near term, we continue to like its longer term potential given encouraging progress of the LNG receiving terminal project to help address supply concerns longer term.

We see moderate earnings risks near term due to lingering uncertainties surrounding ramp-up of existing contracts & delays in signing of new contracts. Indeed, the regulators have been less supportive of PGAS when allocating gas recently, instead favoring allocations to oil co's for oil lifting, PLN, fertilizer co's, and even local govt co's (eg. recent dispute on Ketapang supply). PGAS is trying to address this, inc by lobbying the MoF, industrial customers and Industrial Ministry for support, also increasing its focus on upstream investments to secure off-take. KTA summary below:

Current supply (Conoco): Chevron to get 20mmscfd from Jambi Merang by 2H’11; in exchange, Conoco to return the same amt to PGAS (vs shortfall of abt 80 mmscfd). An additional 65mmscfd from the field is originally committed to PLN’s power plant in South Sumatra, but the plant may not be ready in time. This could be a temporary supply opportunity for PGAS, However, no agreements have been signed so far.

Risk on new supply contract: Our 2012F foreast factors in a 50mmscfd supply from Bukit Tua (Ketapang) field in E. Java, operated by PETRONAS. However, local government entity (Petrogas) is recently trying to intercept a Heads of Agreement (HoA) already in place between PGAS & PETRONAS. BP Migas (upstream regulator) doesn’t appear to be siding with PGAS either. PGAS believes the local govt entity is unlikely to able to execute even if it wins the contract (eg. building the connecting pipelines etc); Given this, at worst PGAS may end up having to buy the gas from the local govt at a margin, but for now PGAS will continue to lobby to retain its HoA.

LNG project progress encouraging: Fabrication of FSRU (floating regas facility) for W. Java has already begun. PGAS is quite comfortable with the 150mmscfd volume commitment from Total/Inpex (Kalimantan) & believes project is on track to start ops by 2H2012.

Upstream investment: The newly formed Planning & Investments Division at the BoD reflects PGAS' increased focus on this. Primary criteria of target fields: a) credible operator(s), b) fields nearing/already at production stage.