ENRG:In pursuit of expansion - Mandiri Sekuritas

Energi Mega Persada (ENRG) is in the track of rising gas prices, which can be seen in previous Kangean GSA of US$5.15/mmbtu and the additional sales from Bentu field to Indah Kiat Pulp (INKP) at US$4.08/mmbtu. Yet, we view that the price may increase to US$4.7/mmbtu (price to PLN). On the other hand, we expect ENRG will seize another 10% stake in Masela given that this gas-rich block is still cheap (US$0.3/boe). Another inclusion will not only cut down EV/2P to some US$0.9/boe, but also increase ENRG growth potential with R/P ratio of 12 years (both beat peers number). Maintain buy at TP Rp180.

We always like gas price increase. We met with Energi Mega Persada (ENRG) and hinted several interesting updates. In addition to gas sales to PT Riau Andalan Pulp and Paper (PT RAPP), ENRG will also sell its gas from Bentu PSC to PT Indah Kiat Pulp (INKP) at price around US$4.08-4.50/mmbtu. But, we view that ENRG will likely negotiate the price up to US$4.7/mmbtu, which is the selling price to PLN. We also believe the new price negotiation is easy to reach as BP Migas would support such gas price increase. New higher price scheme will give potential upside to ENRG cash flow in 2011, again while waiting for Kangean TSB colossal production next year.

20% Masela, still beyond, but possible. Learning from Newmont case, where Bakrie’s Bumi Minerals (BRMS) aimed to clutch another 7% stake in this first-class metal mine, we foresee that ENRG as a Bakrie will also step up for another 10% in this first-class gas block. Furthermore, considering Masela’s deep water exploration (400-700m depth), which imposes greater risk, we believe Inpex as sole operator would like to share the risk and capital. Besides the likelihood of inviting other big players (such as Chevron, Exxon) to share the large financial burden, Inpex will still need a local partner. Thus, another 10% will worth enough for ENRG in our view.

So what will another 10% bring? Certainly, this 10% will enlarge ENRG’s 2P reserves to some 839mmboe (net WI), which in turn will once again undervalue ENRG’s asset-based valuation (EV/2P US$0.9) and strengthen its growth potential as R/P ratio likely jumps to around 12 years. The next question would be how much ENRG will pay for another 10%. We expect the price will be around US$0.5-0.7/boe, higher than initial price of US$0.3/boe, which could mean that ENRG will expend around US$150mn. With FY11F Cash and ST Investment around Rp2tn (US$220mn), we currently view that acquisition can be covered from internal source.


Maintain Buy recommendation at Rp180/share. ENRG is traded at attractive EV/2P valuation at US$01.5/boe, still much cheaper than average Asia-Pacific peers of US$15.6/boe. Multiple wise, PER 11F also quite appealing at 15.9x, but 12F’s 3.1x may nominate ENRG as the cheapest E&P stock worldwide.