PGAS: BPMigas seeks to raise gas sale price for PGAS (TP Rp3,750) - JPM Indo

Jakarta Globe reported on 2 August 2011 in an article titled, “BPMigas seeks to hike PGN gas price by 200%”, that BPMigas chairman is seeking to renegotiate and raise the gas sale price for PGAS from US$2.64/MMbtu in FY10 to US$5.5/MMbtu. BPMigas had successfully renegotiated and raised the gas sale price from US$2.8/MMbtu to nearly US$6.0/MMbtu for Petronas recently.

· Conoco Philips and Pertamina supplies likely to be targeted first: We estimate that out of the 850MMScfd of supply estimated for FY12, two fields, Conoco Philips and Pertamina, account for more than 60% of PGAS’s volume supply. The cost of gas purchased is very low at US$1.85/MMbtu from Conoco Philips and US$2.1/MMbtu with a ceiling at US$2.5/MMbtu from Pertamina. The supply from Santos of (110MMScfd)
is also currently priced at US$2.8/Mmbtu, according to our current estimates.

· Likely material impact on our earnings forecasts: At US$5.5/MMbtu gas input cost, the price hike could have a material impact on our earnings forecast for PGAS. Our sensitivity analysis indicates that both FY11E/FY12E EPS could reduce by more than 60%. The 60%+ likely cut incorporates PGAS’s ability to pass on 70% of the incremental cost increase to its consumers. The impact of such a cut on our DCF valuation would be 17%, from Rp3,750 to Rp3,100.

· PGAS will raise prices to compensate: PGAS mentioned that it will pass on the gas increase to its consumers if BPMigas successfully negotiates new and higher prices. PGAS also mentioned that the current flow at Jambi Merang has reached 80MMScfd and it has received offers for new gas supply (although at a higher price).

· We maintain our UW rating and PT of Rp3,750: The developments could pose a threat to PGAS’s operation. We maintain our UW rating and our DCF-based PT of Rp3,750. Upside risks to our view and PT are: (1) better than expected gas volumes leading to higher earnings; and (2) construction of LNG projects on schedule.