Perusahaan Gas Negara Lower Than Expected On Higher Gas Costs

PGN’s 1Q14 earnings reached USD177m (-19.3% q-o-q), ie 20% of our and consensus FY14 target. This was dragged mainly by higher than expected 1Q14 revenue cost (+17.8% q-o-q). We cut 2014 and 2015 earnings by 7% and 1% respectively, but maintain the DCF-based IDR6,000 TP and BUY call as we increase our long-term growth rate to 6% (from 5%) on the industry’s bright outlook over the long run.

1Q14 financial highlights
Perusahaan Gas Negara (PGN)’s1Q14 revenue declined 5.1% q-o-q despite the growth in its transmission business (+16.1% q-o-q; 5.4% contribution to total revenue) and upstream oil and gas (O&G) segment (+283% q-o-q; 8.0% contribution to total revenue). However, 1Q14 revenue costs spiked upwards 17.8% q-o-q on higher average gas costs, which resulted in gross margins declining to 40.3% (4Q13: 46.7%). PGN experienced a 1Q14 forex loss of USD7m (4Q13: USD26m forex gain) and booked derivatives FVs of only USD3m (-84.3% q-o-q). All in, 1Q14 net income declined by 19.3% q-o-q.

Lower margins spread in 1Q14
PGN’s 1Q14 distribution and transmission volumes picked up slightly, ie 876m standard cu ft/day (mmscfd) (+0.5% q-o-q) and 834mmscfd (+1.7% q-o-q) respectively. The slight pickup in the former was derived from ConocoPhillips (COP US, NR) block. Gas distribution ASPs fell 2.5% q-o-q to USD9.00/m British thermal units (mmbtu) while the margins spread of ASPs to gas purchase costs declined to USD3.50/mmbtu (4Q13: USD3.70/mmbtu). This was the key reason why gross profit declined 9.3% q-o-q. With an expected make-up in gas prices in 2H14, we expect blended gross margins to improve during this period.

Maintain BUY despite earnings cut
We cut PGN’s 2014 and 2015 earnings by 7% and 1% respectively following the lower than expected 1Q14 results. However, we still maintain our DCF-based TP of IDR6,000 and our BUY call on the gas industry’s bright long-run outlook. The future of domestic liquefied natural gas (LNG) is a catalyst. We see that PGN’s strategy of strengthening its value chain by acquiring O&G upstream blocks, and LNG and gas infrastructure expansion as a smart move, as it prepares the company for the expected rise in domestic gas consumption.