PGAS Protecting its rights = BNP Paribas

§ PGAS holds conf call to address concerns on gas price review
§ Management stance is clear, to firmly protect its rights in contract
§ Gas supply from Conoco has started to improve
§ Good value at current level, BUY with TP of IDR4,925

PGAS management held a conference call on Tuesday to address concerns
about the recent proposal by BP Migas (Indonesia’s upstream oil & gas regulator)
to raise the gas purchase price.

Key takeaways from conf call
1) PGAS will not consider BP Migas’s proposal to raise the gas purchase price,
as the contract with Conoco (COP US, not rated) has strong legal grounds and
PGAS will protect its rights. Management stressed that it could not give away rights that already belonged to the company without a proper process or without a clear balanced approach to the overall equation. PGAS will continue to hold serious discussions with BP Migas and, to avoid excessive conflict, the matter will be coordinated at a higher level involving various ministers (not only with BP Migas). 2) Management will consider reviewing the gas purchase price only if there’s any potential gain from a price review, ie more gas supply security as well as additional gas volume. Management re-affirms that it will maintain its margin and profitability. Any increase in the gas purchase price will be passed on to customers. 3) BP Migas has offered PGAS potential new supply (from Conoco’s gas field) of 100-110mmscfd for four years at USD17/mmbtu. While PGAS is interested in
this new supply, it wants a proper deal process on pricing as well as some potential liabilities attached to the contract, as the offer deadline was too short (only two days). 4) On a more positive note, gas supply from Conoco has started to improve and in the past two weeks the gas flow has reached 350-370 mmscfd. In 1H11, the average gas flow from Conoco was only around 300mmscfd, due to diversion to Chevron (CVX US, not rated) to support its oil lifting.

Attractive at this level, BUY with TP of IDR4,925
The market reaction to BP Migas’s proposal has been severe, with the stock down 20% in the past week (also affected by the current market meltdown to some extent). With management’s clear stance that it will firmly protect PGAS’s interest and rights in the contract with Conoco, the concern appears to be over-done. We find the stock attractive at current levels and would see any further correction as an attractive opportunity to accumulate. We have a BUY call on PGAS with a TP of IDR4,925.