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Hindalco------------------------------------------------------------------------- Maintain OUTPERFORM
Strong quarter but could Novelis exceed its FY12 guidance?
● PGAS’s management held a conference call regarding PGAS’
stand on BPMigas’ request in reviewing their old pricing. PGAS
management’s view is consistent with our previous note from
initial discussion with them last week.
● Management believes that it has strong legal ground, and it may
negotiate only if fairly compensated. We believe more expensive gas
price is inevitable given the higher energy costs. However, it will also
be beneficial for PGAS if BPMigas were able to guarantee additional
volume and volume security in exchange of price negotiation.
● We expect any price review, if agreed upon, to be followed by a
selling price increase. In addition, we expect positive development
from West Java LNG development and recovery of Conoco’s
volume as Jambi Merang is ramping up volumes.
● We believe the current share price has factored in the downside
risks and potential upside is greater than downside; we thus
maintain OUTPERFORM. We maintain our target price pending
the outcome of negotiation.
PGAS is prepared to review price in exchange of volume
Upstream regulator (BP Migas) has been asking various gas
producers and off-takers (domestic and export) for the past couple
years to re-negotiate for higher prices, including PGAS. PGAS plans
to use the opportunity to ask for additional volumes and volume
security in exchange. PGAS believes it has a strong legal ground as
there is no clause on government intervention for price renegotiation,
except that the two parties agree on price amendments.
We believe higher price is inevitable, but should be able to
pass through
We believe given the rising energy costs, higher price is inevitable.
However, PGAS should still be able to pass through most of the costs
increase as long as volume security is guaranteed. Alternative fuel for
customer is diesel, which costs ~US$20+/mmbtu vs PGAS’ selling
price of US$6.8/mmbtu, thus the willingness to pay even at a price of
~US$9–10/mmbtu is high.
In addition, BPMigas has offered PGAS a volume of ~100 mmscfd for
four years from Conoco field at a price equivalent to the export price
to Singapore (~US$17/mmbtu). If PGAS were to agree to this price,
this would increase the blended cost to ~US$4.3/mmbtu, and PGAS
would need to raise price by 22% to ~US$8.3/mmbtu to maintain its
current margin. We believe such a price increase, although it seems
significant in magnitude, will still be affordable to end costumers.
Positive development from Conoco recovery and LNG
Management indicated that volume from Conoco has ranged at 350–
370 mmscfd in the past week from ~US$300 mmscfd in 1H11. As
Jambi Merang is ramping up its production to 80 mmscfd, PGAS’
volumes have consequently increased, as it is transporting a portion
of this gas to PLN in West Java. In addition, LNG development is on
track and is now slotted for commercial production in 1H12 (ahead of
our estimate of 1Q13).
Maintain OUTPERFORM
PGAS’ share price has underperformed JCI by 10% in past four days.
We believe the current share price has factored in most of the
downsides, implying there is no volume growth and gross margin goes
below US$3/mmbtu from US$4/mmbtu. If we assume contracted
margin but higher volumes, we estimate DCF valuation of Rp4,200.
Therefore, we believe there is more upside from the current level and
maintain OUTPERFORM. We maintain our forecasts and target price
pending negotiation outcome.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindalco------------------------------------------------------------------------- Maintain OUTPERFORM
Strong quarter but could Novelis exceed its FY12 guidance?
● PGAS’s management held a conference call regarding PGAS’
stand on BPMigas’ request in reviewing their old pricing. PGAS
management’s view is consistent with our previous note from
initial discussion with them last week.
● Management believes that it has strong legal ground, and it may
negotiate only if fairly compensated. We believe more expensive gas
price is inevitable given the higher energy costs. However, it will also
be beneficial for PGAS if BPMigas were able to guarantee additional
volume and volume security in exchange of price negotiation.
● We expect any price review, if agreed upon, to be followed by a
selling price increase. In addition, we expect positive development
from West Java LNG development and recovery of Conoco’s
volume as Jambi Merang is ramping up volumes.
● We believe the current share price has factored in the downside
risks and potential upside is greater than downside; we thus
maintain OUTPERFORM. We maintain our target price pending
the outcome of negotiation.
PGAS is prepared to review price in exchange of volume
Upstream regulator (BP Migas) has been asking various gas
producers and off-takers (domestic and export) for the past couple
years to re-negotiate for higher prices, including PGAS. PGAS plans
to use the opportunity to ask for additional volumes and volume
security in exchange. PGAS believes it has a strong legal ground as
there is no clause on government intervention for price renegotiation,
except that the two parties agree on price amendments.
We believe higher price is inevitable, but should be able to
pass through
We believe given the rising energy costs, higher price is inevitable.
However, PGAS should still be able to pass through most of the costs
increase as long as volume security is guaranteed. Alternative fuel for
customer is diesel, which costs ~US$20+/mmbtu vs PGAS’ selling
price of US$6.8/mmbtu, thus the willingness to pay even at a price of
~US$9–10/mmbtu is high.
In addition, BPMigas has offered PGAS a volume of ~100 mmscfd for
four years from Conoco field at a price equivalent to the export price
to Singapore (~US$17/mmbtu). If PGAS were to agree to this price,
this would increase the blended cost to ~US$4.3/mmbtu, and PGAS
would need to raise price by 22% to ~US$8.3/mmbtu to maintain its
current margin. We believe such a price increase, although it seems
significant in magnitude, will still be affordable to end costumers.
Positive development from Conoco recovery and LNG
Management indicated that volume from Conoco has ranged at 350–
370 mmscfd in the past week from ~US$300 mmscfd in 1H11. As
Jambi Merang is ramping up its production to 80 mmscfd, PGAS’
volumes have consequently increased, as it is transporting a portion
of this gas to PLN in West Java. In addition, LNG development is on
track and is now slotted for commercial production in 1H12 (ahead of
our estimate of 1Q13).
Maintain OUTPERFORM
PGAS’ share price has underperformed JCI by 10% in past four days.
We believe the current share price has factored in most of the
downsides, implying there is no volume growth and gross margin goes
below US$3/mmbtu from US$4/mmbtu. If we assume contracted
margin but higher volumes, we estimate DCF valuation of Rp4,200.
Therefore, we believe there is more upside from the current level and
maintain OUTPERFORM. We maintain our forecasts and target price
pending negotiation outcome.
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