Jun 06, 2016 11:44:57
Perusahaan Gas Negara ($PGAS): Implications from PERTAMINA's Annual Report

The 2015 annual report (AR) of PERTAMINA, Indonesia's largest energy SOE,
highlighted limited competition intensity for PGAS as it increases focus on
growing its downstream oil business and upstream M&A. The AR is important for
PGAS, considering news flow regarding SOE consolidation. It also helps
benchmark PGAS to its competition, PERTAGAS. While we await further clarity
from PERTAGAS's AR, disclosures from PERTAMINA highlighted that PERTAGAS
faced similar challenges as PGAS in 2015. We think fundamentals for PGAS are
recovering, with gas volumes up and 2015 challenges turning into opportunities.
We view consolidation as positive if executed on an arm's-length basis. Maintain

PERTAMINA: Despite a 45% decline in capex, oil production rose 3% YoY, while
gas sales rose 18%. Downstream capex fell 20% with pipeline capex falling an
estimated 40%. Net debt fell 20%, with net debt/equity falling to 0.45x from
0.59x. Given PERTAMINA's declining leverage, we think this lowers the risk of
overpayment by PGAS in the event of any acquisition of PERTAGAS.

PERTAGAS - a challenging year: Contrary to popular perception that PERTAGAS
was taking market share from PGAS, we found limited evidence to back this. Gas
volumes were down 9%, compared to a decline of 7% for PGAS in 2015.
Consequently, PERTAGAS's reported profits fell 21% as it faced challenges of
weak gas demand from a weak domestic economy, similar to what we saw with
PGAS. More importantly, PERTAGAS's margins, which have been a concern for
investors due to possible regulatory intervention, remained flat (like PGAS), on
our estimates. ROA for PERTAGAS was at 8%, vs. 7% for PGAS in 2015.
PGAS added ~2.7x more pipes than PERTAGAS in 2015, with PERTAGAS's
expansion primarily focused on North Sumatra, an area where PGAS has limited
presence. PERTAGAS expects to add ~400km of pipelines to connect Gresik
(East) with Semarang (West) in 2016.

Growth Plans for PERTAMINA: Growth plans are especially important given the
concerns of PGAS possibly overpaying if it were to acquire PERTAGAS. The AR
also highlighted a focus on expanding PERTAMINA's refining capacity and
expanding its upstream assets through M&A and organically. In a Bloomberg
interview (May 15, 2016), PERTAMINA's CEO commented that a consolidation of
PGAS's accounts would give PERTAMINA US$2bn/annum in additional
investment capabilities.