Tuesday, August 9, 2011

Perusahaan Gas Negara Tbk - to Renegotiate Pricing and Volume

by Credit Suisse

The main issue with PGAS is its requirement to continually obtain gas supply from third parties, which remains challenging at this juncture. The pricing issue, in our view, is adding more uncertainties to PGAS profitability and earnings outlook. We reckon the Street has been kind to provide the benefit-of-the-doubt for PGAS to resolve the aforesaid issues over the past 3-6 months, and we believe massive earnings downgrade for the company is in the offing. We are not yet compelled to buy the stock at this juncture.

BP Migas, the upstream regulator, requests gas pricing in the sales/purchase contracts to be revisited to reflect the current prices. PGAS, which contracts 50-60% of its volumes at below US$3/mmbtu, was asked to raise the contracted prices (well-head US$5-6/mmbtu, export US$11/mmbtu).

PGAS intends to pass through the price increases to end costumers if it had to raise the gas purchase prices. But PGAS believes its gas purchase contracts have strong legal ground, which opens negotiations opportunities with the regulators to find a middle ground.

Analyst Fonny Surya believes PGAS has the pricing power, and BP Migas will likely allocate additional gas volume at higher purchase price.

Fonny also believes PGAS current share price has priced-in the downside risks, making the risk/reward profile of the stock attractive.

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