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Perusahaan Gas Negara (PGAS IJ. IDR1,150 BUY. TP: IDR1,300) - 30 Juni 2020
June 30, 2020 13:30

Perusahaan Gas Negara (PGAS IJ)

Ongoing US$6 gas plan, mired by the pandemic

 

We spoke with PGAS’ IR team to discuss the latest new gas SPAs which appear to be for existing gas users. At the present time, the Covid-19 pandemic may delay overall recovery for PGAS. Looking ahead, we understand the key catalyst is new supply agreements with foreign contractors. We roll over our DCF valuation and upgrade our TP and recommendation to BUY.

Key US$6 gas plan to be implemented retroactively. PGAS currently operates by charging normal gas prices. However, the ministerial decree KepMen 89/2020 will be implemented retroactively from 13 April, setting a lower price of US$6/mmbtu for a fixed quantity of ~620bbtud gas (320bbtud for the 7 strategic industries, and 300bbtud for power plants incl. possibly IPPs) in the next 4 years. This will be accompanied with a reduction in upstreaming gas costs to US$4-4.5/mmbtu with an expected margin for this quantity at US$1.5-2/mmbtu which will impact PGAS’ current gas margin of +US$2.5/mmbtu. Nonetheless, PGAS is expected to be compensated in-kind mainly by improving its gas distribution volumes with the support of the ministry of minerals & resources (MEMR) helping to find both the gas demand and its supply. 

The Covid-19 pandemic has delayed the effectiveness of the gas plan.The volumes for April 2020 reached 804bbtud and PGAS disclosed that in May and June vols. reached 654bbtud/714bbtud for PGN + Pertagas in total. PGN’s latest 880bbtud guidance for 2020 may have to be reviewed depending on whether there is a 2nd wave of Covid19. According to PGAS’ IR team, any expansion beyond 880bbtud vol. would take place at a growth pace of 3-4%yoy which accounts also for the time to build the necessary pipe infrastructure and LNG terminals. 

Implementing KepMen89/2020, enlisting eligible gas users, waiting for foreign contractors to renew supply contracts. PGAS’ commercial director recently announced new gas SPA agreements including with Krakatau Steel (KRAS IJ, non-rated) for 12-15bbtud, and for 32 new clients for 1.3bbtud. We understand these are contract renewals in line with the ongoing implementation of KepMen 89/2020. We also understand that any gas user which is not in the KepMen list may apply to the relevant authorities to become eligible for the lower price. Upstreaming supply at US$4-4.5/mmbtu should be the current focus as we expect to hear updates from foreign contractors who control significant resources in the South Sumatra Block Corridor.

Upgrade to BUY. We upgrade our TP as the group is determined to generate OPEX and CAPEX savings at the rate of 30%yoy. We also appreciate the MEMR efforts to maintain gas ASP at US$6/mmbtu and upstreaming costs @4-4.5 per mmbtu reducing the uncertainty on PGAS’ margin from increasing costs. We thus adjust accordingly our estimates for PGAS’ gas margin, OPEX and capex. The company will attain benefits more towards the medium and long term.

 

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