Oil and gas sector: Gas price contract re-negotiation more than just a noise? (Overweight) - Mandiri

􀂄 Last week, we saw the unexpected comment by BPMigas regarding the need for domestic gas price contract to be reviewed (in the context of plan to re-negotiate gas selling price to foreign buyers including Fujian province, China). This week, president director of PGAS held an analyst conference call saying that if the company’s purchase contract were to be reviewed, the management would demand some form of compensation, one of which could be a permission to pass-on the cost increase to its industrial customers.
􀂄 Today, president director of Pertamina E&P told the press that he expects the business-to-business negotiation on gas selling price to be concluded by year-end 2011. He sees the current gas selling price (from E&P companies) of US$2.5/mmbtu as uneconomical, preferring the selling price to be above US$4.0. (Bisnis Indonesia).
􀂄 Our take – if such re-pricing occur (a big if still, since the move would involve an Indonesian state owned company re-negotiating a contractual agreement with a foreign entity), the biggest beneficiaries would be the E&P companies such as Medco Energi (Neutral) and Energi Mega Persada (Buy). Although PGAS management argues that they could be able to passon the price increase on its gas supply, we doubt if the company can meet volume growth expectations set forward by the market. We suspect the company may see lower demand for its gas, if the selling price is set at US$8.00 versus current price of US$6.50. The stock may continue to rebound along with other big cap names in Indonesia today, but at some stage investors may consider the news as an excuse to switch-out.