ENRG:Delivering the promise - Mandiri

Energi Mega Persada (ENRG) has finally recorded net income in 1Q11 at Rp14bn, still below our and consensus estimate due to cyclicality. We see that ENRG will push production in later period. Since our first recommendation, ENRG price has increased by more than 60%. We believe ENRG prices will still go up given that ENRG provides compelling metrics for each type of investors. On asset-based, ENRG is still below its local peer at EV/2P US$1.8/boe. Multiple wise, PER12F is 6.7x, still much cheaper than regional and local peers (13.2x). As ENRG has fulfilled production in Bentu and PUO as promised, as well as high conviction in Kangean TSB, we lower our uncertainty discount from 25% to 10% to arrive at new TP of Rp220/share. We then reiterate our Buy call.

1Q11 result below estimate on cyclicality. ENRG reported strong revenue of Rp422bn (+64.0% yoy, 0.6% qoq), below our and consensus estimates due to cyclicality and minor delay in Bentu and Kangean PUO production (expense has been incurred). Meanwhile, ENRG finally booked net income of Rp14bn although still below ours and consensus. We still believe that ENRG will push production by 3Q11-4Q11 as we can see 4Q10 revenue itself (Rp419bn) reached 50% of total 9M10 revenues (Rp831bn), while 4Q10 operating income (Rp137bn) even overlapped 9M10 level (Rp54bn).

Oil price rose above estimate. Oil prices both globally and locally have experienced sharp increase since the start of the year. Indonesia Crude Price (ICP) as of Mar11 reached US$113/bbl (+43.7% yoy, +16.4% ytd). ENRG booked ASP of US$108/bbl in 1Q11, higher than its estimate of US$85/bbl. The ICP increase will clearly benefit ENRG this year, coupled with production ramp-up in Bentu and PUO.

Push Bentu and PUO in next period. Production in Bentu and Kangean PUO fields was slightly delayed to end Feb11, which resulted in lower income. ENRG plans to push production from those fields in 2Q/3Q to 7,000 boepd (above initial target). Although it may cause minor reservoir damage, we appreciate such plan as it may make up for the previous delay and foster FY11F production target. If this plan is enacted, we may see work-over costs to increase next year.

Upgrade TP to Rp220/share, reiterate Buy. ENRG’s has so far fulfilled its production schedule with the initiation of Kangean PUO and Bentu, despite minor technical delay. Moreover, the signing of GSA in Kangean TSB field previously has also indicated that the probability of the success in Kangean TSB is very high. We appreciate the current achievement and therefore lowered our previous 25% uncertainty discount on our TP to 10%. This leads to a higher TP of Rp220/share.