ENRG Initiating Coverage

PT Energi Mega Persada tbk

27 January 2011 www. waterfrontsecurities.co 1

PT Energi Mega Persada Tbk

Unlocking Potential Oil price roars to the pre-crisis level

By the end of 2010 the Nymex Crude Oil price closed at 91.38 dollar per

barrel, a level we have not seen since the Lehman Brothers collapsed.

Surging demand of oil from emerging market has pushed the energy

inventory level shrink and push up the price of the black gold commodity

higher. Now, as the economy revives stronger from the global crisis,

Indonesia as one of potential to become a giant economy now in full

throttle to spend in manufacturing and of course unlocking their

abundant energy potential such as natural gas.

Huge Off-shore resources awaing to be exploited

Indonesia has total around 171.3 trillion cubic proven gas which much of

them not in the production phase yet. The next huge project that

expected to produce is Masela Block, which located in Maluku Province,

that estimated hold reserve up to 18.5 TCF. The Block licensed to

Inpex, which sell 10 percent of its stake to an Indonesian private oil and

gas company (PT Energi Mega Persada Tbk).

Finally delivered

PT Energi Mega Persada tbk (EMP) as one of the largest energy

producers in Indonesia holds huge untapped resources with Masela block

is its latest venture. After being delay by financial crisis, we believe

EMP’s large projects will come on stream soon. We expect the company

will produce nett 20,260 and 41,280 barrel of oil equivalent per day in

the next two year (2011 & 2012) from current production, which is

around 13,000 barrel of oil equivalent per day. We also assume

company’s ASP will stay above 90 dollar per barrel as the pressure of

inflation will stay in the coming years.

Valuation, BUY 12-month Target Price IDR 380

We initiate Energi Mega Persada Tbk (ENRG) with BUY recommendation

and 12 months target price at IDR 380, we came out the price by using

DCF valuation. ENRG currently trading on 71% discount to our TP.

Additional risks to our view include :1) volatility of oil price which might

result in under forecast, 2) delayed on project at Kangean and Bentu

Blocks, 3) any future possible change in accounting treatment as a result

of new oil and gas industry law which expected to be out this year.

Financial Summary 2008 2009 2010F 2011F 2012F 2013F

Revenue (Rp Bn) 1,859 1,444 1,210 2,114 3,952 4,332

Operating profit (Rp bn) 583 27 155 698 1,845 1,983

Net Income (Rp bn) -35 -1729 -95 407 1349 1564

EPS (Rp) (2) (120) (2) 10 33 39

PE (x) -34.62 -1.61 -46.74 10.88 3.28 2.83

PBV (x) 0.33 1.60 0.71 0.66 0.55 0.46

DER (x) 2.39 4.87 0.61 0.69 0.63 0.57

ROE (%) -0.9% -99.3% -1.5% 6.1% 16.8% 16.3%

Source: Company, Waterfront Research

BUYBUYBUYBUY

Sector : Oil and Gas

Last Price Rp109

PT Energi Mega Persada Tbk

Code : ENRG

Recommendation:

BUY TP: Upside: 245%

Valuation:

DCF

Source : Metastock

Stock Data

Market Cap. (in RpBn)

Market Cap. (in USDMn)

Share Outstanding (million) 40,584

Free Float (%) 76%

52w Range 75-178

Key Indicators

FY09A FY10E FY11E

ROE, % -99% -2% 5%

PER, x -1.6 -46.7 13.0

PBV, x 1.6 0.7 0.7

EBITDA Margin, % 0% 0% 0%

EV/EBITDA 50.2 76.4 10.3

DER, (x) 4.9 1.0 0.6

EPS Growth, % -4849% 95% 460%

Source: Company, WSI Research

Analyst

Jemmy Paul W [email protected]

Tel: (021) 529 21166

491,519

4,424

Initiating Coverage

January 27, 2011

380



Oil price roars to the pre-crisis level

By the end of 2010 the Nymex Crude Oil price closed at 91.38 dollar per barrel, a level we have not

seen since the Lehman Brothers collapsed. As the surging demand of oil from emerging market has

pushed the energy inventory level shrank. That result to a surge in price of the black gold commodity

higher. Global Manufacturing Indexes across the globe has been recovering from the slump that

caused by late financial crisis on western countries. Higher cost of production as the inflationary effect

also boosts the price of oil. According to International Energy Agency (IEA), oil should reach above 70

dollar a barrel to reach a level that can attract more exploration and investment to find new oil and

gas fields. Indonesia, a net importer oil country is now struggling with the current price because of

burden of subsidizing energy to its people. Having know as on oil giant producer at the 80s, the

country now only depend more to its gas production. Although being just number 12 in holding gas

reserves in the world according to World Fact Book, the country has become the eighth largest natural

gas exporter in the world. It is not because of its abundant gas resources, but because the lack of

speed for using natural gas as an energy source for its domestic consumption. As the economy revives

stronger from the global crisis, Indonesia now is in full throttle to spend in manufacturing and of

course unlocking their abundant energy potential such as gas.

Figure 1. Indonesian Crude Price (ICP) chart

Source: US Energy Information Administration

Figure 2. Rank of Countries as Largest Natural Gas Exporter

Source: Wikipedia-World Fact Book



Figure 3. Rank of Country with Largest Natural Gas Proven Reserves

Source: Wikipedia-World Fact Book

Huge Off-shore resources awaing to be exploit

Indonesia has total around 171.3 trillion cubic gas proven which much of them not in the production

phase yet. Several issues has made the progress so slow. From the national interest to corruption

suspicion has made several largest blocks delayed its production. D-Alpha Block in Natuna, which

currently hold the largest reserve in Indonesia, is still in the join partnertship stage after the

government gave the operator right to National Petroleum Company (PERTAMINA) from the previous

licensed operator Exxon Mobile. The second largest (Tangguh Block) is now in production stage but

still not achieved production plan scheduled as it still behind schedule planned to deliver to their

customer. The other one is Donggi-Senoro Block which project being suspend because of corruption

issued and delayed because of the export portions that still negotiate. The next huge one is Masela

Block, which located in Maluku Province that estimated hold natural gas reserved up to 18.5 TCF. The

Block is licensed to Inpex, which sell 10 pct of its stake to Indonesian private Oil and gas company

which is PT Energi Mega Persada Tbk (EMP)

EMP as second largest oil and gas company in Indonesia with equity access

Significant role of oil and gas company in Indonesia is increasingly being attractive to investors due to

current oil price which promised huge gain through investment in that sector. Indonesia is a country

that dominates by its National Oil Company (NOC) that is PT Pertamina Persero is now in need for

equity access for investor to involve in this sector. EMP that currently hold second largest market

capitalization of public oil and gas company in Indonesia Stock Exchange (IDX) is a very undemanding

cheap valuation company which offer great potential of returns. EMP that currently hold 567 million

barrel oil equivalent (MBOE) 2P Reserves is a very cheap pick as it only trade at 1.58 times EV/2P

through our current estimate enterprise value. It is so much cheaper compare to its peer in Asia

Pacific regional, which trade around 5.1 times EV/2P. We believe that EMP will finally produce positive

bottom-line beginning this year as the realization of new oil and gas wells will increase its oil and gas

production by 43 % and 192% in 2011, 2012 respectively. A jump in oil price and realization of

higher ASP in its natural gas sales will start to effect this year. That will made the company revenue

soar up. A multiple growth in net income will be expected as a steady growth in cost of production in

the coming years cant be compare to multiple output in revenue.



EMP has 5 production blocks and 2 huge blocks expected come on stream

EMP hold production in 5 Blocks which produce around thirteen thousands barrel oil equivalent per day

last year. The contribution of its oil and gas production is almost the same. Unfortunately, due to

Sales Agreement that EMP hold in the past, the company is not making much dollar in the recent

natural gas price hike. EMP’s gas sales price is only 2.7 dollar per mmbtu on 2010. That price is

discounting about 40 percent from current gas price that traded in New York Mercantile Exchange. We

believe that lack of fortune will now evolve into profit since the company has renegotiated the current

price of gas delivery. We expect the company will improve its average gas-selling price by 34% and

112% to $3.52 /mmbtu and $5.57/mmbtu respectively in 2011 and 2012. The fortune will be double

as company will also book an increase on its oil average selling price to 91.7 dollar per barrel and 100

dollar per barrel according to our assumption in 2011 and 2012, compare to its current oil ASP around

79 dollar per barrel.

Figure 4. EMP Natural Gas Reserves and Indonesia Estimated Natural Gas Reserves

Source: Company, EM

Kangean and Bentu blocks is expected to double EMP production.

Early January 2011 EMP just announced that its wells from Pagerungan Utara in its Kangean Block

starting to produce around 6000 barrels per day. As it hold only 50% share on that block due to sales

of interest to its 2 partners we expect that company will get around 3000 barrells oil per day in its oil

production. That will means an increase for about 50 percent on its production. The block, which hold

most of the EMP reserves before the acquisition of 10 percent, Masela Block will also produce about

300 bbtud next year. That will made EMP output almost 4 fold jump than its current production in

2012. We expect the company will produce more than triple its revenue in 2012 after the production

coming on stream. Not just because of the amount it produce, but also from the adjustment of its

average selling price which will be as high as $5.57/mcf. In 2010 company has made adjustment of

the selling price with its existing buyers to revised 90 percent of its gas sales above $5/mcf. Since

most of its short term project is a long delayed project then we believe there will be no much delayed.

Gas pipeline already secured and the buyers already made commitment to purchase the output with

conditions agreement which profitable to EMP. The company now expecting an output around 25 bbtu

from its Bentu Block early this year. We also believe there will be no delayed on Bentu project as the

production plan scheduled to start in late 2010.



Figure 5. EMP Oil and Gas Assets

Source: Company, EMP

Masela acquisition.

On December 2010 EMP announced that its already sealed the transaction of buying 10 percent stake

in Masela Block, one of the largest natural gas block in Indonesia. The company bought the stake at

around 30 cents dolar per barrel oil equivalent. It means more than 90 percent discount compare to

market price of M&A oil and gas asset which around 4 dollar per barrell. Santos, an Australia gas

company which hold a block near Masela Block just sold its interest around that figure. The 10

percent Masela block acquisition will make the company 2P reserves jump 2.5 times. If the production

plans of Masela block coming on schedule at 2016 we will see company revenue jump 5 times

according to our model.

Figure 6. EMP after Masela acquisition

Source: Company, EMP



Bakrie Grup after Vallar deals

As a subsidiary of Bakrie group EMP has experience a very hard time during the financial crisis. We

believe crisis of cashflow is the problem that hit EMP the most. Lack of trust from financial institution

has made company cost of fund surge. That resulting a lack in its organic investment activities. We

believe that the company history of not meeting production plan scheduled in the past years is simply

cause by lack of funding. Since the right issue succeeded, we believe EMP will now meet their

production planned on schedule. The hike in price of oil, restructured gas ASP and exploding

production will made the company stronger. Recent parent company group with Vallar will also boost

company prudential and image in the eyes of investors. We expect company will success restructured

its debt with a less costly interest next year as the result of current financial performance.

Figure 7. EMP Oil Average Selling Price (ASP)

0

20

40

60

80

100

120

2008 2009 2010E 2011E 2012E

do

llar

per

barr

el o

il

Source: Company, EMP, WSI Research

Figure 8. EMP Gas Average Selling Price (ASP)

0

1

2

3

4

5

6

2008 2009 2010E 2011E 2012E

US

do

lla

r p

er

mm

btu

Source: Company, EMP, WSI Research


Jemmy Paul Wawointana www. waterfrontsecurities.com 7

Valuation, BUY 12-month Target Price IDR 380

We initiate Energi Mega Persada Tbk (ENRG) with BUY recommendation and 12 months target price at

IDR 380, We came out the price by using DCF valuation. Another valuation using EV/2P reserves

might need to be consider because it still have huge discount compare to its peers in Asia Pacific. We

choose DCF valuation due to ENRG now becoming more in operation activity. ENRG currently trading

on 72% discount to our TP. Additional risks to our view include :1) volatility of oil price which might

result in under forecast, 2) delayed on project at Kangean and Bentu Blocks, 3) any future possible

change in accounting treatment as a result of new oil and gas industry law which expected to be out

this year.

Income Statements 2008 2009 2010F 2011F 2012F 2013F

in Billions of Rupiah

Total Revenue 1,859 1,444 1,210 2,114 3,952 4,332

Cost of Revenue, Total 1073 1261 970 1314 1984 2202

Gross Profit 786 184 240 800 1,967 2,130

Operating Expenses, Total 203 156 85 102 122 146

Operating Income 583 27 155 698 1845 1983

Interest Expense & Finance charge -739 -1396 -285 -250 -250 -250

Interest/investment income 134 0 0 88 192 340

Others 41 -49 0 0 0 0

Net Income Before Taxes 19 -1417 -130 536 1787 2073

Provision for Income Taxes 55 315 -32 134 447 518

Net Income After Taxes -35 -1729 -95 407 1349 1564

Minority Interest 2 3 3 4 8 9

Net Income -35 -1729 -95 407 1349 1564

Net Margin (%) -2% -120% -8% 19% 34% 36%

Number Of Shares Outstanding (mill) 14401 14401 40584 40584 40584 40584


Balance Sheets 2008 2009 2010F 2011F 2012F 2013F


Cash and Equivalents 231 49 281 1854 2258 3297

Total Receivables 2145 1564 931 1232 1358 1814

Total Inventory 481 396 332 580 805 1189

Others current asset, Total 672 231 231 231 231 231

Total Current Assets 3528 2241 1775 3898 4652 6531

Property/Plant/Equipment, Total 6585 6105 5768 5393 6442 6472

Other Long Term Assets, Total 2513 1906 2587 1978 2028 2021

Total Assets 12627 10252 10130 11268 13123 15024

Accounts Payable 433 638 491 665 1004 1254

Other Current Liabilities 1135 3621 1271 1271 1271 1271

Long Term Debt 6692 3802 1664 2221 2388 2476

Other Liabilities, Total 620 417 417 417 417 417

Total Liabilities 8880 8478 3843 4574 5080 5418

Minority Interest 35 33 33 33 33 33

Common Stock 1440 1440 4058 4058 4058 4058

Additional Paid-in Capital 3355 3355 5344 5344 5344 5344

Retained Earnings -133 -1863 -1957 -1551 -202 1362

Other Stockholder Equity -950 -1191 -1191 -1191 -1191 -1191

Total Equity 3711 1741 6254 6661 8009 9573

Total Liabilities & Equities 12627 10252 10130 11268 13123 15024



Jemmy Paul Wawointana www. waterfrontsecurities.com 8

Statement of Cashflow 2008 2009 2010F 2011F 2012F 2013F


Net Income -35 -1729 -95 407 1349 1564

Depreciation 6692 3802 1329 1302 1302 1302

Change in Working Capital 620 417 318 -375 -11 -590

Net - CFFO 51 36 1552 1334 2639 2275

Chg. Property/Plant/Equipment 7327 -480 -337 -1414 -1385 -1229

Chg. Other Long Term Assets 3355 -607 -2991 -609 -850 -7

Net- CFFI -1267 -1823 -3328 -2023 -2235 -1236

Change in Long Term Liabilities 4775 -2890 -2687 557 167 88

Chg, Minority Interest 0 0 0 0 0 0

Chg. Equity 0 0 4513 0 0 0

Net - CFFE -737 1547 1826 2263 0 0

Net Cashflow -1953 -240 50 1573 404 1039

Cash at the Beginning 621 455 231 281 1854 2258

Cash at the End 231 49 281 1854 2258 3297


Financial Ratios 2008 2009 2010F 2011F 2012F 2013F

Profitabilitiy

ROA -0.3% -16.9% -0.8% 3.0% 8.2% 7.8%

ROE -0.9% -99.3% -1.5% 6.1% 16.8% 16.3%

Gross Margin 42% 13% 20% 38% 50% 49%

Ebitda Margin -1.9% -119.7% -7.8% 19.2% 34.1% 36.1%

Pre Tax Margin 1.0% -98.1% -10.7% 25.4% 45.2% 47.9%

Net Margin -1.9% -119.7% -7.8% 19.2% 34.1% 36.1%

Leverage

Total Debt/Assets 0.70 0.83 0.38 0.41 0.39 0.36

Total Debt/Equity 2.39 4.87 0.61 0.69 0.63 0.57

Net Gearing 68.5 82.2 19.5 6.8 -5.2 -20.6

Interest Coverage 0.03 -1.02 -0.45 2.15 7.15 8.29

Activity

Sales Growth 63% -22% -16% 75% 87% 10%

Net Profit Growth -343% -4849% 95% 530% 232% 16%

Valuation

Enterprise Value in bill 6756 5374 6720 5232 3121 -229

EV/Ebitda 7.83 50.23 55.79 6.65 1.50 (0.10)

EPS (2) (120) (2) 10 33 39

PE (x) -34.6 -1.6 -46.7 10.9 3.3 2.8

EV/Sales (x) 3.63 3.72 5.55 2.47 0.79 -0.05

BVPS 258 121 154 164 197 236

PBV 0.33 1.60 0.71 0.66 0.55 0.46

Dividen yield 0 0 0 0 0 0

Source Company: Waterfront Research

Key to Waterfront Investment Rating:

BUY = >15% upside potential, NEUTRAL = + 15% upside/downside, SELL = > 15% downside potential within 12 months period

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ENRG Initiating Coverage