Bill Guerin, Jakarta – "Of course the risks are high. But if not us, who else is willing to take the risk?" So asked Hilmi Panigoro, chief executive of PT Medco Energi Internasional Tbk (Medco), earlier this year in an interview with local media.
He was charting the strategy for the company his older brother, Arifin Panigoro, oil tycoon, empire-builder and confidant of President Megawati Sukarnoputri, has built into Indonesia's biggest publicly traded oil and natural-gas company. Medco has a total market capitalization of US$486 million and operations in Southeast Asia, the Middle East and North America. Its share price closed on Monday at Rp1,425 (about 15 cents).
It is 85% owned by holding company New Links Energy Resources, with the remaining 15% held by public and financial institutions. New Links in turn is 34% owned by Thailand's top energy enterprise PTT Exploration and Production (PTTEP). Credit Suisse First Boston (CSFB) owns 20% and Panigoro and his family hold the remainder.
When affirming its recent B+ corporate credit rating on Medco, Standard & Poor's explained that though the outlook for the company was stable, the rating was constrained by the short life of proven reserves, large capital expenditure requirements, concentration risks, and the company's "very aggressive financial policy". This last comment may have been a tad understated, given the force with which Medco has been divesting and acquiring assets in the oil and gas sector.
Last week it was announced that India's largest oil refiner, Indian Oil Corp (IOC), wanted to buy into Medco. Though IOC controls nearly 60% of the petroleum-products market in India and owns nine refineries in the country, it does not have a stake in any producing oil and gas fields.
Reports have said that IOC may buy a 40% stake in Medco in a deal worth about $600 million, although the company's market capitalization is less than $500 million. Its declared assets as of December 31 last year were $979 million. The board of IOC has approved a bid, though this will need to be approved by the IOC's largest shareholder, the Indian government.
However, a Merrill Lynch report says the valuation of Medco had been inflated by a recent surge in its shares on speculation of an acquisition. Shares of Medco on the Jakarta Stock Exchange (JSX) jumped 29% in one day, August 11, from Rp375 to Rp1,650, with 13.7 million shares changing hands on the first reports that IOC might buy an equity stake in Medco.
It was also reported last week that Emirates National Oil Company (ENOC), a company owned by the government of Dubai in the United Arab Emirates and chaired by Sheikh Hamdan bin Rashid al-Maktoum, deputy ruler of the emirate, was buying the 46% stake Panigoro owns in troubled Dragon Oil, which is already 60%-owned by the ENOC.
Medco's profits up
Medco's total revenue last year was a modest $463 million, but the company reported a 20% increase in first-half net profit this year to $52.7 million from $44 million in 2003, mainly due to higher oil prices, which averaged $30.65 a barrel in the first half, up from $22.81 during the same period last year. Revenue was up 9.6% for the first half of this year at $227.96 million.
Last year, Medco projected that its 2004 oil production would drop by 14% on depleted reserves. Though production has been declining, the part acquisition last month of Australia's mid-sized energy company Novus Petroleum Ltd is expected to result in a 50% net increase in Medco's combined oil and gas reserves, according to the company's finance director, Sugiharto.
However, the company itself has projected that its proven oil reserves of 154 million barrels of oil equivalent will last only four years, while its proven and probable reserves of 754 million barrels of oil equivalent will run out in 12 years.
Novus has assets in Australia, Indonesia, Oman, Pakistan, the Philippines and the United States, with proven and probable reserves of 107 million barrels of oil equivalent. The acquisition was fully financed from the company's $250 million unsecured notes issued in May, and from operating cash of about $40 million.
"The Novus assets are attractive to us, as they can expand our interest in Indonesia and give us the potential for geographic diversification of our asset base," explained Sugiharto.
By selling some of the Novus reserves, Medco will also raise more funds to look for other acquisitions, but analysts have cautioned that financing the Novus buyout mostly by debt would burden Medco and risk its net profit if it turns out that Novus has no reliable long-term reserves.
Nonetheless, Medco has struck a deal with Silk Route Investments to negotiate the sale of Novus' reserves in the US, and part of its interests in reserves in the Middle East and Pakistan. Medco has also agreed to sell some of the Novus reserves in Australia and Indonesia to Santos Ltd for about $110 million.
Last month's deal covers the sale of Novus' entire 4.75% stake in the Australian Cooper Basin oil-and-gas block and also includes the sale of an 18% interest in the Brantas block and a 9% stake in the Kakap block, both in Indonesia.
Medco at present produces about 70,000 barrels per day (b/d), but during the first half of this year production fell by 22% year-on-year to 56,200 b/d on declining output from its main oil-producing fields in the Kaji/Semoga and Rimau blocks in South Sumatra.
However, in the same period, the company's gas production rose to 78.5 million cubic feet a day from 74 million. The average price for gas rose to $1.58 a thousand cubic feet from $1.52 a year earlier.
Growth in production and proved reserves, says Standard & Poor's, will depend partly on the materialization of gas-sales contracts, which in turn hinge on the development of Indonesia's gas infrastructure to absorb Medco's large uncommitted gas reserves. Medco's proven gas reserves are mostly in its Kalimantan and Sumatra fields and it is exploring the Donggi and Senoro gas fields in Toili, Central Sulawesi, which are estimated to have total reserves of some 20 trillion cubic feet, almost twice the 14 trillion cubic feet remaining in the Arun field in Aceh.
Production at both fields is expected to begin by 2008. "We have to monetize such abundant gas reserves, so that over the next five years we can balance our oil and gas production," Sugiharto said, when announcing plans to boost production of natural gas over the next five years to meet an expected jump in demand from the power industry, the transport sector and households.
The new president of state oil-and-gas firm PT Pertamina, Widya Purnama, plans to boost consumption of natural gas, in line with moves by other countries in the region to switch to cleaner-burning fuels. "Natural gas is expected not only to be used in the form of LPG [liquefied petroleum gas] or LNG [liquefied natural gas], but also for lighting, automotive fuel and for other purposes," Purnama said in August in his first statement to the press.
To grab a bigger share of this growing market, Medco plans to invest in infrastructure and begin to develop its capacity to supply gas.
Oil and Gas Law No 22/2001 stripped Pertamina of its monopoly in the industry, and its oil and gas fields are being handed back to the government, though the company may continue to operate the areas as a production-sharing contractor.
The Oil and Gas Upstream Regulatory Body (BP Migas) has taken over Pertamina's authority to manage oil and gas areas and oversee production-sharing contractors. The Senoro field in Central Sulawesi is jointly owned by Medco and Pertamina and supplies gas to state-run electricity firm PT Perusahaan Listrik Negara (PLN).
Indonesia has some 140 trillion cubic feet of gas reserves and BP Migas recently signed $4.3 billion worth of LNG sales agreements with several international and local oil and gas companies. The agreements cover the sale of 1.7 trillion cubic feet of natural gas, including one deal that commits state-owned gas-distribution company PT Perusahaan Gas Negara (PGN) to buy gas from Medco and ConocoPhilips to meet demand in West Java and Batam.
Greater export opportunities also fuel Medco's interest in gas. It has already signed an agreement with Marathon Oil Corp to export LNG from Donggi to the US West Coast.
Arifin Panigoro's entry into a sector with such high operating risks started when he bought an oil rig after Bawden Drilling, a foreign contractor, refused to cooperate with him on his first project in the early 1970s. Buying this rig was his biggest challenge ever. He relates that he had to go to the US to get a rig and brought $300,000 to the table – a fortune in those days – before managing to persuade state-owned Pertamina's Japanese partner, Nissho Iwai, to put up a guarantee to the Americans for the balance of the $4.5 million for the rig.
By 1981 he had already won contracts worth Rp20 billion, but his big break came in September 1982, when his group Meta Epsi won a tender for a Pertamina project to install gas pipes. Working with a foreign partner, Fluor, he built the Pertamina refinery in Cilacap.
Panigoro went from strength to strength in electrical construction, installation of gas pipes and joint ventures in oil refining, and the peak of his business achievements came when he founded Meta Epsi Drilling Co (now Medco), which was floated on the JSX in 1994.
Medco plans to forge ahead with replacing reserves that have been exploited and to add new concessions for growth, by boosting exploration and by acquiring new fields.
In the interview earlier, Hilmi Panigoro said the company saw tremendous opportunities in Indonesia because the investment climate was still in a poor state compared with other countries and consequently there was no strong competition in the country for oil and gas investors.
The unclear division of authority among the central, provincial and regency administrations and unreliable political and legal conditions have ensured that the interest of foreign investors in Indonesia is still at a low level, said Hilmi. "But for us, this has provided an opportunity. American firms are not as aggressive as they once were. Amid the weakened competition, we have a chance to become a host in our own country," he concluded.