Perusahaan Gas Negara In Line With Higher E&P Contribution

PGAS’ 2Q14 core profit of USD201m (+11.3% q-o-q, 23.5% y-o-y) brought 1H14 core profit to USD381m (+2.6% y-o-y), making up 49% of our FY14 estimate of USD786m (+5.4% y-o-y). Higher contribution from its E&P segment led to a higher margin mix in 2Q14, resulting in a 21.4% q-o-q growth in 2Q14 operating profit and a higher blended operating margin of 33% (1Q14: 28%). Maintain BUY and SOP-based TP of IDR6,600.

Strong contribution from non-gas distribution
Perusahaan Gas Negara’s (PGAS) 2Q14 revenue increased 2.4% q-o-q to USD862m, mainly driven by the contribution from the exploration and production (E&P) segment amounting to USD85m (+25.8% q-o-q), offseting the relatively flat performance from its gas distribution segment. 2Q14 gross margin surged to 46.0% from 40.3% in 1Q14, bolstered by a higher gross margin mix of the E&P (2Q14: 71%; 1Q14: 11%) and transmission (2Q14: 15%; 1Q14: 7%) segments.

Flat distribution volume
PGAS’ 2Q14 gas distribution volume dipped 2.3% q-o-q to 856mmscfd (million standard cubic feet per day), given low activities in May due to national holidays. However, 1H14 distribution volume increased 4.8% y-o-y to 866mscsfd, vs 826mmscfd in 1H13.

Higher net gearing
In May, PGAS obtained USD1.35bn worth of senior unsecured bonds as part of its attempt to acquire E&P assets and expand its natural gas pipelines. With 1H14 total interest-bearing debt of USD2.4bn, the company’s net gearing stood at 28.2%. Note that PGAS alllocated capex of USD681m in 1H14, representing 40% of our FY14 capex estimate of USD1.7bn.

Outlook
We think that PGAS’ higher gearing level and increased exposure to the higher-risk business (E&P segment) are justified for securing long-run gas supply as part of the nation’s attempt to replace oil-related products with gas as the latter is cheaper and cleaner.
Valuation. We maintain our 2014-15 earnings forecasts at this juncture. We also keep our BUY call and SOP-based TP of IDR6,600, implying a 15x 2015 P/E.