Indonesia Industry Focus

Oil & Gas

Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 Dec 2015

JCI : 4,374.19
No longer an easy play
Analyst
The era of easy oil & gas is over William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com
Low crude oil price is the key factor
Insufficient support from government
Initiate MEDC with HOLD and ELSA with Fully
Valued

Challenging industry outlook. Indonesia's oil & gas

sector will face multiple headwinds as low crude oil price
outlook will halt existing and potential projects' STOCKS
economic feasibility. Indonesia's average lifting cash cost
Performance (%)
is at US$20-40 per barrel and at this crude oil price level, Price Mkt Cap Target Price
Rp US$m Rp 3 mth 12 mth Rating
we believe current existing drilling are operating at a
thin profit if not loss, and as their exploration projects Medco Energi 760 179 820 (68.0) (78.7) HOLD
are mainly offshore, deepwater ones, they are subject to Elnusa 245 127 205 (42.4) (62.9) FULLY VALUED
delays and write-offs. The low crude oil price Source: DBS Vickers
environment is also negative for oil & gas service
companies, given downward fee re-negotiation from its Medco Energi : Integrated energy company, explores and produces oil
and gas both in Indonesia and internationally
struggling clients.
Slow progress on oil & gas reform. We see only Elnusa : Integrated oil services company, offers services that include
geophysical data, drilling and oil field services
marginal reform in Indonesia's oil & gas industry and so
far, we do not see any relevant incentives/support for
upstream investors and contractors amid the currently
challenging situation. With existing regulations and
policies, plus current low crude oil prices, Indonesia's oil
& gas industry appears to be unattractive to investors.
Initiate MEDC with HOLD, TP Rp820 and ELSA with
Fully Valued, TP Rp205. We initiate MEDC with HOLD
and ELSA with Fully Valued. We see MEDC's low-cost
structure helping it to cope with the current situation,
while its valuation is undemanding but future outlook is
uncertain as its key reserves unlock in overseas assets.
We have a Fully Valued call on ELSA as we see the
contract fee renegotiation and dry new contract
renewal.

ed-TH / sa- MA
Industry Focus
Oil & Gas
Investment thesis: No longer an easy play
Indonesia's oil & gas industry will face challenges ahead on low
crude oil prices and insignificant industry reform, which will
negatively impact both oil & gas contractors and service
companies' businesses. Current deregulation and reform
progress is very slow and a little bit too late, in our view, while
crude oil price has plunged to a low level.
We do not see any relevant incentives from government to
upstream oil & gas contractors to support oil & gas upstream
drillers amid to support their operation and business going
concern at our US$60 per barrel and US$65 per barrel in FY16
and FY17 respectively, and our long-term crude oil price of
US$70 per barrel (2017 and beyond).
National oil & gas activity, covering from exploration to lifting
activity, are facing headwinds which will lead oil & gas
production volume downtrend, which will cause Indonesia to
continue relying on imported energy (mainly oil) in the future.
The number of new potential investments and project feasibility
have reduced in the last five years and are subject to
impairments at the current level of crude oil price. Meanwhile,
existing wells are entering their period of decline.
We initiate coverage on Medco Energy (MEDC) with a HOLD
rating and Elnusa with a Fully Valued rating with target prices of
Rp820 and Rp205 respectively. Amid the bleak oil & gas price
outlook, Indonesian oil & gas companies are focusing on
maintaining positive earnings, capital allocation and cash
reserves while putting production volume growth as a lower
priority. This is means there will be no earnings growth and
potential stock price upside, in our view.
Low crude oil price. We are basing our oil & gas industry
analysis on our regional in-house crude oil price assumption
of US$60 per barrel. There are negative implications to
Indonesia's oil & gas industry as the country's oil & gas cash
cost projects average at US$35 per barrel. We believe at
current price range of crude oil price, 90% of new
investments and projects in the pipeline are not feasible
and subject to be written-off. Existing oil wells are entering
their period of decline. The industry trend, according to our
channel check, is focusing on managing costs.
Slow reform in upstream oil & gas industry. Indonesia's oil
& gas industry reformation as per government's plans, such
as streamlining the paperwork bureaucracy and incentives
for deep water drilling progress is very slow as per a survey
on the oil & gas stakeholders in Indonesia by
PricewaterhouseCoopers (PWC). We do not see any
Page 2
structural changes in Indonesia's oil & gas industry
regulations, which is positive or would at least help
contractors to survive amid the crude oil price downtrend.
The government's focus on initiating the fuel storage
expansion in Indonesia amid the slow upstream oil & gas
reform signals that Indonesia will continue to rely on oil
imports in order to extend Pertamina's operational fuel
reserve from 22 days to 30 days. We also believe the
initiatives is not a long-term solution to fix the national oil
& gas production bottleneck.
Uncertainties on PSC expiration extension. The
government's plan to take over the expiring PSC (averaging
eight years) via Pertamina raises uncertainties for investors.
In this case, Mahakam Block has been under process of
take over by Pertamina recently under presidential decision.
Downtrend in exploration investments; threat for
Indonesia's long-term oil & gas reserves and production.
Exploration investments have also halted at current crude
oil price level as contactors seek to strengthen their balance
sheets and cash flows. Oil & gas contractors will focus on
short- to medium-term plans such as maintaining
efficiencies on existing operations. Low crude oil price
create another challenge besides the internal issues such as
the challenging bureaucracy which used to be the only
single bottleneck of Indonesia's oil & gas industry
expansion.
Execution risk on existing reserve monetisation . 75% of
the current remaining oil and gas reserves are located in
the Eastern part of Indonesia, offshore and dominate by
gas. Offshore drilling cash cost per barrel is 200% higher
than onshore in general. Moreover, the Eastern part of
Indonesia lacks infrastructure and gas captive buyers which
also means the natural gas produced in Eastern part of
Indonesia is not price competitive with the domestic
market.
Negatives for oil & gas services. We are negative on oil &
gas services as current low crude oil prices squeeze
contractors' profitability and project feasibility. This means
oil & gas service companies' earnings outlook will be more
uncertain given rising competition, tough contract
renegotiation and slow new contract roll-outs.
Undemanding valuation, but we see further de-rating
potential for ELSA. Indonesia's oil & gas companies' stocks
have dropped by 70% YTD (including OSV) and we believe
the current valuation is undemanding. MEDC's low-cost

structure will support its survivability in the currently
challenging industry conditions. On the other hand, We
believe market expectations on its turnaround story is
overdone amid current slowing industry dynamics which
hurt its upstream-related oil & gas business.
Risks
We aware that we could be wrong on our analysis, which could
lead to inaccurate earnings forecast, target price derivation and
stock rating. We list the key assumptions that we understand
could deviate from our base assumption in our analysis, as
follows:
Our long-term crude oil price assumption. We base our
analysis on our in-house long-term crude oil price
assumption. Hence, if the actual crude oil price range miss
from our forecast, our view regarding national oil & gas
industry outlook, per company earnings forecast and target
price can be varied from our view and forecast.
Faster-than-expected oil and gas reform. If the
government's oil & gas industry plan transformation is
faster than expected, Indonesia's oil & gas investments will
ramp up better than expected and oil & gas service
companies will benefit from the rising upstream oil & gas
investments.
Better-than-expected drilling technology. We assume only
conventional drilling technology application in Indonesia as
we believe the unconventional technology is too expensive
Industry Focus
Oil & Gas
at our long-term crude oil price assumption. We can be
wrong if a new breakthrough technology is available in the
market at a reasonable price.
We under estimate the feasibility of oil and gas reserves in
Eastern part of Indonesia. We assume the development
and monetisation of Eastern Indonesia's oil & gas reserves
will be very slow on infrastructure bottleneck. We can be
wrong also if the government provides incentives for
offshore deepwater drilling and hence, the price
competitiveness could be maintained.
Execution risks. Our forecast on MEDC depends on its
capability to monetise, whether its domestic or overseas oil
& gas reserves. We use reserve life index multiple in our
terminal value, implying that MEDC's execution capability
will impact our target price. For ELSA, our earnings growth
forecast depends on its capability to find, and renew
existing contracts with competitive rates.
Energy mix substitution threat; gas and coal. Amid the
struggling domestic oil & gas production expansion, again,
coal is the strongest candidate to fill the energy supply gap.
Indonesia has 80bn ton of coal reserves which it is ready to
monetise in the case of seaborne market structural
slowdown. Moreover, LNG is also more economically
feasible to import after the oil price slump as oil & gas
players such as Pertagas and Medco are continuously
expanding their LNG facility and infrastructure.
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Industry Focus
Oil & Gas

Initiate coverage on MEDC and ELSA with HOLD and Fully
Valued ratings, TP of Rp820 and Rp205 respectively
We initiate MEDC and ELSA with a HOLD and Fully Valued
rating with DCF-based target price of Rp820 and Rp205
respectively. Our calls for both stocks reflect our bearish views
on Indonesia's oil & gas sector as the current low crude oil price
has raised another challenge besides current bureaucracy bottle
neck, fading periods on existing old wells and offshore new
reserves monetization challenges.
We also believe Indonesia's oil & gas companies' valuations are
undemanding and further de-rating potential is minimum, given
the steep correction in stock prices in the last one year.
Exception for oil & gas service companies particularly ELSA,
which is exposed to the risks of existing contracts' working fee
renegotiations and slow new contract roll-outs. Current
However, we also believe that monetising gas reserves woule be
challenging on MEDC's unfavourable geographical conditions.
MEDC's gas reserves are located in the Eastern part of
Indonesia, which means that the company's natural gas should
compete with imported gas and another onshore field natural
gas producers.
Key earnings forecast
We forecast MEDC's EBITDA to grow by only 2% FY15-17
CAGR, driven by modest production volume expansion,
stabilised ASP on stabilised crude oil price volatility and
contribution from jointly controlled investments, mainly on
DSLNG upstream-downstream projects.
Revenue, EBITDA and net profit
1,000 45%

valuation also still reflects consensus expectations on its 900 40%

800
continuous business turnaround efforts. Meanwhile, we expect 700
35%

30%
the turnaround to take a longer time and will not be as good as 600
25%
consensus expects amid current challenging upstream oil and 500
20%
400
gas industry. 300
15%

200 10%

5%
1) We have a Hold rating and TP of Rp820 for MEDC 100
0 0%
We initiate coverage on Medco Energy with a Hold rating with 2011 2012 2013 2014 2015F 2016F 2017F

target price of Rp820 (FY16 EV/EBITDA of 6.9x and P/BV 0.2x), Revenue EBITDA Netprofit EBITDAmargin

implying no upside potential from the current stock price. We

Source: DBS Vickers, Company
believe MEDC's valuation is undemanding. However, we do not
see any positive catalyst within the next twelve months amid
We believe EBITDA margin will be stable at the 32-33% level.
low crude oil price which pressurise earnings and halt MEDC's
We believe management, given its proven execution track
expansion. MEDC will focus on survival, maintaining positive
record in the past two decades, will maintain MEDC's low-cost
cash margin and profitability as well as its balance sheet and
structure and higher ASPs in FY16 and FY17, in line with our
cash flows in the short to medium term.
crude oil price benchmark assumption. MEDC's current cash
cost per barrel of US$15 per barrel will gradually expand as it
MEDC will rely on its existing profitable oil & gas blocks'
will implement a strategy to enhance its existing profitable oil
operations given their highest profitability. However, they have
reserves in Rimau.
limited potential in production volume upside. Moreover, in
order to maintain a sustainable production volume momentum,
Oil & gas lifting cash cost per barrel (US$ per barrel)
we believe MEDC needs to incur extra costs in technology and
20
methodology which is more expensive than conventional 18 17
18
16 16
drilling. 16
14
14 13
12
12
On the other hand, we believe MEDC will struggle to monetise 10
its overseas assets as current low crude oil price erase the 8

projects' economic feasibility. Execution risk is another issue as 6

the regulation structure is also uncertain in countries like Libya 4

2
on government transition. Note that Medco's 45% oil reserves

is trapped in its overseas assets. Hence, MEDC will focus on 2011 2012 2013 2014 2015F 2016F 2017F

monetising its remaining domestic oil & gas reserves. Liftingcostperbarrel

Source: DBS Vickers, Company

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 Industry Focus
Oil & Gas

We believe MEDC will rely on existing productive and profitable
oil & gas blocks such as Rimau block, South Sumatra, and
potentially its newly commenced Senoro-toili block, in order to
maintain positive cash margins and strong cash flows.
Oil & gas reserves by location
gas service companies will be the most negatively impact by the
also are facing fee renegotiation risks as many contractors are
struggling financially.
We initiate coverage on Elnusa with a Fully Valued rating and
target price of Rp205 (FY16F PE of 8.0x), implying a 15%
downside potential from its current stock price. We believe oil &
low crude oil price on existing contract renegotiation and
difficulties in obtaining new contracts. ELSA has begun to face
renegotiations from contractors as seen in its 2Q15 financial
performance despite stable profitability.

ELSA is looking to maintain growth momentum via overseas

working scope expansion to India and Myanmar. This not only
signals limited incoming new contracts from domestic industry,
but it also raises our concerns on ELSA's unproven track record
in executing overseas projects. However, the company believes
that the working contract term is more flexible vs. domestic,
Source: DBS Vickers, Company and hence it could maintain healthy profitability with
competitive contract fee.
On the other hand, we believe MEDC will postpone the majority
of its green- and brown-field project expansions given their Key earnings forecast
unattractive economic feasibility at low crude oil price. This EBITDA and earnings will reach Rp586bn (-12% y-o-y) and
implies MEDC will spend only 60% of its budgeted capex in the Rp497bn (-15% y-o-y), while net profit also has a similar trend
next three years. We see this as a sign of prudent capital and reach Rp308bn (-40% y-o-y) and Rp189bn (-16% y-o-y) in
allocation as MEDC will carefully time its cash flows and debt FY15 and FY16 respectively. Our earnings forecasts are around
maturity. 15% below consensus' forecasts as we believe the consensus
has not fully accounted for the likelihood of existing contract
Our MEDC's capex trend vs. company guidance renegotiations which will hurt ELSA's revenue and earnings
500 470
growth, despite the company's capability in maintaining stable
456
450 417 profitability ahead.
400
350 324 335

300 275
Gross profit, EBITDA and net profit forecast (Rpbn)
250 230 224 230 800 760
201
200 176 700 665 652
647
605 599 586
150
600 551
100 506
497
500 468
453
50 412
400
285 308
2011 2012 2013 2014 2015F 2016F 2017F 300 238
202 189
Capex Guidance 200 163
128
100
Source: DBS Vickers, Company

(100) (43)
2) Meanwhile, we have a Fully Valued rating on ELSA 2011 2012 2013 2014 2015F 2016F 2017F

with Rp205 TP Grossprofit EBITDA Netprofit

We believe oil & gas service companies will secure a low
number of new contracts on contractors' exploration
investment downtrend in the next several years, given the low
crude oil price, which will translate into fewer projects entering
the exploitation stage. Moreover, existing ongoing contracts
Source: DBS Vickers, Company
We believe ELSA faces negative top-line growth from all its
upstream-related businesses, given the slowing upstream oil &
gas contractors' activity of its clients. MEDC and Pertamina are
ELSA's largest clients and both have scaled back their capital

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Industry Focus
Oil & Gas

spending mainly on new oil & gas reserve survey and slower top-line growth, ELSA could maintain stable profitability
exploration activity, which are ELSA's significant revenue and mainly on its overhead spending.
earnings contributor. Meanwhile, we believe other segments
such as drilling services activity performance will be relatively We also estimate that ELSA will scale back its capex spending
stable, as contractors will continuously monetise their profitable amid challenging new contracts winning. Our capex forecast is
reserves even at the current low crude oil price, in order to lower than the management's guidance on its company latest
generate cash flows. Our capex assumption is lower than management guidance.
This is in line with our forecast assumption that ELSA will rely
We believe ELSA could maintain stable profitability as its major only on existing project renewals instead of new contracts.
costs are salaries and overheads. ELSA's careful cost control in Hence, ELSA can minimise its capex by slashing unnecessary
maintaining its expenses was seen in its 1H15 performance. spending on new equipment and engineer hiring.
Amid the contractors' contract renegotiation which reflects in

ELSA's profitability trend (%) Capex trend (Rpbn)

20.0
18.0
400
366
17.3
16.516.2 350
15.7 15.8 15.5 15.816.3
14.6
15.0 300
12.7 262 264
11.5
9.8 250
10.0 215
8.2 201
6.2 200
6.0 5.8 5.7
5.0 4.3
150 130
2.7 110
100
0.0
0.9 50

5.0
2011 2012 2013 2014 2015F 2016F 2017F 2011 2012 2013 2014 2015F 2016F 2017F

Grossmargin EBITDAmargin Netprofitmargin Capex

Source: DBS Vickers, Company

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 Industry Focus
Oil & Gas

Valuation looks undemanding but we remain cautious MEDC five years' price-to-book value band
Indonesia's oil & gas stock performance, mainly SMC (Shipping)
(x)
like Wintermar Offshore and Logindo Samudra Makmur
dropped by 87% y-o-y and 84% y-o-y respectively per June 1.0

2015. MEDC and ELSA's stock price performance dropped by +2 stdev

61% and 38% y-o-y respectively in the same period since the 0.8
+1 stdev
crude oil price collapse in June 2014.
0.6 Average
Stock price performance since Mid-June 2014
0%
-1 stdev
0.4
10%
20% 12.70% -2 stdev
30% 0.2
Jan-12 Jan-13 Jan-14 Jan-15
40%
38%
50% Source: DBS Vickers, Bloomberg Finance L.P.
60% 54%
61%
70% ELSA five years price to book value band
80%
90% 84% (x)
87%
100%
2.1
WINS LEAD MEDC ELSA APEX BIPI
+2 stdev
Stockpriceperformance

Source: DBS Vickers, Bloomberg Finance L.P. +1 stdev

1.4

Average
The valuation has fallen to the financial crisis level in terms of
book value, as the panic selling in recent months is a reflection 0.7
-1 stdev
of the deferred recovery of oil prices, as US shale has yet to
show any meaningful production cuts and the world's largest oil -2 stdev
importer- China- is seeing slower economic growth, further 0.0
Jan-12 Jan-13 Jan-14 Jan-15
fuelled by a strengthened USD and fears of financial crisis.
Source: DBS Vickers, Bloomberg Finance L.P.
MEDC looks attractive at price-to-book below 0.5x, its lowest
P/BV multiple in the last five years. Meanwhile, ELSA is still Indonesia's oil & gas industry is trading at FY16 EV/EBITDA of
trading at 1.2x P/BV, in line with its average five-year average 5.0x. Both ELSA and MEDC are trading at their five-year average
P/BV multiple. We are excluding the smaller, not rated oil & gas EV/EBITDA of 5.0x and 3.5x respectively. Meanwhile, SMC is
companies (both contractors and services) as we see smaller trading at a discount given its capital-intensive business
players struggling more than companies under our coverage, characteristics, mainly on vessel purchases. MEDC is trading at a
thereby distorting our analysis. We believe ELSA's valuation is slight premium to the industry average given its low-cost and
still being backed by its better results following its management strong capital structure, which increase its survivability amid the
turnaround in 2012-2014. currently challenging situation, we believe.

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Industry Focus
Oil & Gas

MEDC five-year EV/EBITDA band MEDC five-year PE band

(x) (x)
50.0
7.0
+2 stdev
6.0 +2 stdev 40.0

5.0 +1 stdev +1 stdev

30.0
4.0 Average Average
20.0
3.0 -1 stdev
-1 stdev
2.0 -2 stdev 10.0

1.0 -2 stdev
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 0.0
Jan-12 Jan-13 Jan-14 Jan-15
Source: DBS Vickers, Bloomberg Finance L.P. Source: DBS Vickers, Bloomberg Finance L.P.

ELSA five-year price EV/EBITDA band ELSA five-year PE band

(x) (x)
21.0
+2 stdev
+2 stdev
7.0

14.0 +1 stdev
+1 stdev
5.0
Average Average

3.0 7.0
-1 stdev -1 stdev

1.0 -2 stdev
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 0.0
Jan-12 Jan-13 Jan-14 Jan-15
Source: DBS Vickers, Bloomberg Finance L.P. Source: DBS Vickers, Bloomberg Finance L.P.

Our sanity check with price-to-earnings ratio multiple also
confirms that Indonesia's oil & gas companies' valuation is
undemanding as it is currently trading at -2SD of its five-year
multiple standard deviation (see chart) ex. ELSA, which still at
five years average mean. We prefer to measure our upstream oil
& gas companies on EBITDA basis as it is more comparable and
excludes any one-off write-offs, which is possible at the current
low crude oil price level and financing cost. EBITDA also tells us
more about the firm's survivability and solvency instead of net
earnings, in our view.
Relative to our regional coverage, Indonesia's oil & gas stocks'
valuation is relatively undemanding relative to our ASEAN
coverage after considering its profitability performance and
overall top-line bottom-line growth outlook (see table on the
next page). However, we do not see this is as an argument to
accumulate Indonesia's oil & gas stocks as we believe they are
relatively reasonable priced. Meanwhile, regional oil & gas stock
valuations, mainly those in Singapore, are demanding, this is
reflected by their stock price drop, which is the steepest in our
ASEAN coverage.

Despite ELSA's valuation looks undemanding on EV/EBITDA

multiple, ELSA is still trading at double digit P/E multiple of
12.0x despite we believe our earnings forecast for next year is
fairly conservative as we include only the existing contracts. We
also prefer to use P/E multiple as valuation metrics beside DCF,
as ELSA contract-based business model only require external
financing for capital expenditure only after ELSA locked a
project or contract, with certain economic feasibility guarantee

Page 8
 Industry Focus
Oil & Gas

Regional Comparison
PE (x) EV/EBITDA PBV ROAE EBITDA growth (%yoy) Net profit growth (%yoy)
Stock Market
Stock price* cap 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016

Indonesia

Logindo Samudramakmur 178 31 0.4 10.8 5.8 3.2 6.1 4.2 0.1 0.2 0.2 16 2 4 20.2 (30.2) 26.3 21.4 (85.5) 87.7

Wintermar Offshore Marine 160 44 2.0 255.1 9.6 3.2 6.6 5.6 0.2 0.2 0.2 11 0 2 7.1 (51.0) 24.4 (19.8) (99.2) 2559.5

Elnusa 343 141 4.8 6.4 10.4 2.1 1.7 1.9 0.8 0.8 0.7 17 9 7 24.3 (17.9) (8.8) 73.2 (39.6) (16.1)

Medco Energy 1,150 260 27.1 7.0 7.9 3.5 4.2 4.7 0.3 0.3 0.2 1 4 3 28.0 (9.0) 1.0 (72.5) 290.3 (12.1)

Malaysia

Bumi Armada 0.91 274 21.3 18.3 12.5 9.3 8.2 7.0 0.8 0.8 0.7 5 4 6 (11.0) 29.6 23.4 (41.7) 16.4 47.2

Coastal Contracts 1.89 1,004 5.4 5.4 7.0 3.1 5.9 6.0 0.7 0.6 0.6 16 13 9 27.7 10.1 (14.1) 26.2 0.1 (21.9)

Dayang Enterprise Holdings 1.7 1,491 8.3 10.2 8.7 5.8 6.6 5.4 1.8 1.7 1.5 24 17 18 55.8 (15.2) 13.9 20.7 (19.0) 16.8

Dialog Group 1.59 8,085 37.8 29.6 29.5 26.9 21.3 20.1 5.2 4.7 4.3 15 17 15 15.8 23.9 8.4 11.7 27.5 0.4

Malaysia Marine & Heavy En. 1.07 1,712 15.9 19.0 20.2 7.8 9.1 8.8 0.7 0.6 0.6 4 3 3 (31.7) (8.8) 0.6 (54.4) (16.4) (6.2)

UMW Holdings 7.68 8,972 8.3 13.0 12.3 7.1 9.0 9.1 1.4 1.3 1.2 17 10 10 11.7 (21.2) 2.8 103.2 (36.5) 5.6

Singapore

Cosco Corporation 0.375 840 40.2 505.4 87.4 20.2 17.8 16.3 0.6 0.6 0.6 2 0 1 (18.7) 13.3 18.5 (31.8) (92.0) 478.1

Ezion Holdings 0.66 731 3.4 5.3 3.0 6.7 7.3 4.8 0.7 0.6 0.5 24 12 18 58.3 1.0 48.2 40.8 (36.1) 78.5

Keppel Corporation 6.76 12,262 6.5 8.4 8.8 5.7 7.3 7.3 1.2 1.1 1.1 19 14 12 4.6 (34.1) (2.8) 2.1 (22.0) (5.2)

Mermaid Maritime 0.158 157 3.2 14.0 9.9 1.8 3.6 7.8 0.3 0.3 0.3 9 2 3 77.5 (45.9) 27.3 214.2 (77.4) 41.8

Sembcorp Marine 2.25 4,701 8.4 10.0 10.3 6.7 7.9 7.6 1.6 1.5 1.4 20 15 14 11.4 (6.8) 4.2 0.8 (15.8) (3.3)

Vard Holdings 0.445 3,119 8.9 31.0 42.8 23.6 54.8 41.8 0.8 0.7 0.7 9 2 2 (37.5) (55.1) 4.9 (2.2) (71.2) (27.6)

Yangzijiang Shipbuilding 1.12 19,197 5.5 5.4 5.0 3.6 2.9 2.2 0.9 0.8 0.7 18 16 16 (13.3) 11.0 4.8 12.4 3.1 7.3

Thailand

IRPC PCL 3.8 77,651 nm 7.6 11.0 nm 9.7 9.2 1.1 1.0 1.0 (7) 14 9 (225) (357) 4.4 (733.5) (295.7) (31.1)

PTT 245 699,794 12.5 9.7 9.0 5.4 6.0 5.4 1.0 1.0 0.9 8 10 10 1.6 (11.6) 13.9 (40.1) 28.8 8.5

PTT Exploration & Production 71.5 283,854 13.2 15.0 11.8 1.7 3.2 3.0 0.7 0.7 0.6 5 5 6 8.7 (36.3) 18.7 (61.8) (11.9) 26.8
* Price as of 30 November 2015
Source : DBS Vickers, Bloomberg Finance L.P.

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Industry Focus
Oil & Gas

Long term crude oil price assumption of US$70 per barrel; next two years. Expectations for OPEC to cut production has
oversupply is still the key issue been low so far given OPEC's reluctance to cede market share.
We have imputed DBSs regional oil and gas price assumption
to our analysis and forecast for Indonesia oil and gas industry OPEC production trends
and the stocks that we cover. We have assumed Brent crude oil
price of US$45/bbl - US$55/bbl in FY15 and US$55-US$65/bbl
in FY16. Our FY15-16 crude oil price assumption in our ELSA
and MEDC financial forecast is US$5/bbl lower than our
regional current oil price forecast. Our long term Brent crude oil
price assumption is US$70/bbl and our regional supply and
demand view is summarized in this section. Our full report
'Drilling Deeper for the Gems' released 18 September 2015.

Widening supply and demand gap - worse than consensus

expectation
We believe crude oil prices will remain under pressure based on
the widening supply gap in 2015, as well as geopolitical factors
like the removal of sanctions on Iran. Higher productivity in the
US shale oil sector has largely fended off the challenges from
low oil prices but the question is for how long. Expiring oil
selling price hedges will help to lower supply in 2016-17 and
this point underpins our thesis on higher oil prices compared to
the current level.
The gap between global crude oil and gas supply and demand
has widened to 2mmbpd this year, though this is expected to
contract to around 1mmbpd in 2016. However, the gap is
unlikely to be bridged before 2017 at the earliest.
Global oil production and consumption trend forecast
Source: DBS Vickers, Bloomberg Finance L.P.
At the beginning of the year, consensus believed that Saudi
Arabia's policy of maintaining oil production would push US
shale oil players out of business. However, US shale oil
production has increased 18% (as June 2015) y-o-y since oil
prices started to free fall in June 2014. Productivity is the key
reason of higher oil production despite the fact that working
rigs from 7 regions comprising the bulk of tight oil production
actually experienced a dramatic decline to 579 units as of July
2015.
Another factor that has allowed US shale oil players to cope
with Saudi Arabias high production levels: break-even oil prices
are lower than expected. This is has been due to the knock-on
effect from productivity gains since break-even levels are
moving targets. The break-even level of US$ shale players is as
low as US$42/bbl with an average of around US$58/bbl.

WTI breakeven levels for US shale plays

90 80
80 73 74
70 61 62 65
54 55 56 58
60 50 52 53
50 42 43
40
30
20
10
0
Source: DBS Vickers, EIA
Wolfberry
AnadarkoTight Oil
EagleFordOil

Wolfbone
WoodfordCana

Utica

Bakken(MT)
PRBTight Oil

MissisipianLime

Wolfcamp(Midland)
EagleFordCondensate

Wolfcamp(Delaware)

BoneSpring/Avalon
NiobaraWattenber

Bakken(ND)

There has also been no let up regards production from OPEC

countries, led by Saudi Arabia. Production has consistently
remained above the 30mmbpd cap set by member nations so
far in 2015. Iraq and Saudi Arabia are key countries behind the WTIbreakevenforUS$shaleplays

production increase in recent months. Iran is still producing Source: DBS Vickers, EIA
2.8mmbpd and expectations are that can ramp up to
3.8mmbpd - a level before sanctions were imposed - over the

Page 10
 Industry Focus
Oil & Gas

Low crude oil price has not led to any significant pickup in OECD oil inventories and forecasts
demand either
China will still be adding 0.3mmbpd incremental oil demand in
2015/16 but it will no longer be the demand driver like in the
past. Chinas economic data has been weak in recent weeks.
The stock market turbulence and Yuan's devaluation also
stoked fears of hard landing and collapse in demand for
commodities. Overall OECD inventory levels continue to rise
from 58 days at the end 2014 to about 63 days of supply
currently.

Source: DBS Vickers, EIA

Structural issues likely to impact oil-prices ahead

Source: DBS Vickers, Bloomberg Finance L.P.

Page 11
Industry Focus
Oil & Gas

Indonesia: the era of easy oil & gas drilling is over
We see more challenges from economic and technical aspects
for our long-term crude oil price assumption of US$70 per
barrel. At the current crude oil price range, which is hovering
around US$50-60 per barrel, many new projects commenced in
the last three years should be postponed, if not halted, given
the diminishing drilling economic feasibility.
Meanwhile, on the other hand, 75% of remaining resources are
located offshore, shallow & deepwater, in remote Eastern
Indonesia, according to our discussion with Indonesia Petroleum
Association (IPA). As offshore drilling is exposed to more
challenges due to the remote and harsher environment,
offshore, mainly on deep water drilling, is only feasible when
the crude oil price is above US$70/bbl.

Technically, even excluding the estimated time periods for Resources by theme
dealing with administrative work, Indonesia's time to
production will naturally expand given the shift to more
complex offshore reserves which require more financing and
technology, a risk taking without proven risk-and-reward
profile.

In this section, we will only discuss on Indonesia's reserve profile

and its monetisation challenges, on top of uncertainties in
government reform progress and blue print, which we will
discuss in the next section.

New reserves locked offshore, Eastern part of Indonesia Source: DBS Vickers, IPA
In the oil & gas business, crude oil prices also determine the
field economic feasibility covering the risk tolerance, financing Potential reserves by location
and technical aspects. This means, at our long-term crude oil
price assumption of US$70/bbl, not all existing and potential oil
field projects are economically feasible or in the better case, it
would take a longer project payback period.

Indonesia's current cash cost/bbl has reached US$30/bbl,

blended between onshore and offshore cash cost average of
US$20/bbl and US$40/bbl respectively, with major onshore
projects, old wells. However, current old fields are entering their
period of decline.

Exploitation stage contract area (%)

Source: DBS Vickers, IPA

Indonesia largest offshore mega project is also potentially

delayed. We estimate that the project would only feasible at
Offshore
41.3% crude oil price of above US$70/barrel or at least at our long-
term crude oil price assumption, given its more comprehensive
Onshore
operational challenges and field locations. Even successful
58.8% exploration will require additional rig time to appraise
discoveries. The government provides a better PSC scheme for
deepwater drilling.

Source: DBS Vickers, SKK Migas

Page 12
 Industry Focus
Oil & Gas

Indonesia's large offshore projects

Projects Description

Indonesia deepwater development project (IDD) Integration Gehem-Gendalo-Bangka Project to monetise 3 TCF of gas reserves with an
- Chevron estimated total project capex of US$12bn. Project still awaiting approval revision POD

Floating LNG project in the South Maluku - Abadi field for the monetisation of gas reserves of
approximately 6 TCF with total capex of US$7bn project. Project awaiting approval PSC
Abadi Masela Floating LNG project - Inpex contract extension
Train 3 expansion project with a capacity of 3.8m MPTA and capital expenditure estimated at
Tangguh Train III - BP US$12. FID is expected in 2015 and go on stream in 2019
East Natuna Project (d/h Natuna D-Alpha) has 222 TCF reserves which 46 TCF can be
East Natuna Project 0 (Pertamina-Exxon-Total- produced due to the high CO2 content of 70%. Total capex estimated at US$24bn and
PTTEP) planned decision FID 2016
Source : IPA, DBS Vickers


Gas dominates potential resources; distribution and Gas distributors are only willing to invest in distribution and
infrastructure availability is the key issue transmission pipeline infrastructure if a certain area has a
85% of remaining potential resources is dominated by gases potential captive market. PGAS's distribution infrastructure
which means, future reserves discoveries and production focuses on Sumatera, East Java and West Java, where industrial
activity will be more on gas. On the other hand, fewer oil and manufacturing activities are the busiest.
discoveries means that long-term oil reserves replacement ratio
will remain at the current low level. In this section, we try to PGAS working scope (SBU I, II & III)
assess the impact on Indonesia's oil & gas landscape if gas play
a more important role in Indonesia's energy mix.

Resources by type

Source: DBS Vickers, Company

Source: DBS Vickers, IPA
In terms of the drilling technique, investment and field
infrastructure requirements, they are relatively similar with
drilling oil. However, the difference is in the monetizing,
transporting and finding buyers in the Eastern part of
Indonesia. Major gas distributors like PGAS and Pertagas do not
have infrastructure in the Eastern part of Indonesia in the
absence of a captive market comprising mainly industry buyers.
Moreover, unlike the Western part of Indonesia, the Eastern
part is more scattered and separated by seas. This means that
even distribution and transmission infrastructure has less
economical feasibility on a shorter and narrower pipeline scope
of work. Underwater natural gas transportation will also take
time to build and is expensive.
Given the absence of potential buyers in the Eastern part of
Indonesia, transportation alternatives such as shipping is also
less economical vs. onshore pipeline distribution. We estimate

Page 13
Industry Focus
Oil & Gas
that the transportation cost per MMSCFD is 40% higher than
via onshore pipeline. Moreover, there are further infrastructure
requirements such as a dedicated LNG port and storage.
The only solution is to sell the gas at a higher price, but amid
the weakening economy and natural gas demand as we
discussed on our Perusahaan Gas Negara coverage, we believe
that it will be more difficult to find buyers from third-party
distributors or end users for gas produced in the eastern part of
Indonesia.
In reality, major industry players are suffering from high energy
costs amid the weakening IDR. Some industry associations have
urged the government to lower the natural gas price, an
indication that buyers are being squeezed by competition and
weak consumer purchasing power.
This implies the eastern part of Indonesia's gas price will not be
competitive vs. existing onshore gas produced. A prolonged
story on upstream supply bottleneck is also not really valid in
the current weak economy as the problem also arises from the
weakening demand. This means, with a higher price, more
expensive natural gas will not find any buyers right now.
Produced & remaining oil and gas profile
Source: DBS Vickers, IPA
Another example of the Eastern part of Indonesia is Masela
block, which current project status is under review, a move
which will potentially delay the country's largest deep water gas
project. Coordinating Minister of Affairs Rizal Ramli called on
SKK Migas and pointed out that the development of the gas
block should be linked to an onshore LNG plant instead of an
offshore floating plan proposed by Inpex. This confirms our
thesis that the eastern part of Indonesia is hardly marketable
given the infrastructure and geographical challenges. Hence,
the export market is the best option for this region's oil & gas
projects, which at the same time also means that the eastern
Page 14
part's upstream oil & gas activities will not significantly help
Indonesia.
Existing onshore reserves need enhancement and
unconventional technology, but it is costly
Existing production oilfields, at an average age of 12 years, is
entering their period of decline. Boosting oil & gas production
in old wells requires technology which will raise the drilling cost
higher than conventional earlier stage wells. This means oil
drillers' cash cost will rise in the coming years as they will try to
monetise the existing fields further while waiting to exploit their
newfound reserves when oil price is at its peak.
Oil production will enter its decline phase after 40-50% of the
oil field reserves have been monetised. We estimate that the
current wells have a remaining life of eight years, and assuming
that the reserve replacement ratio remains at the current level
of 60%, most of Indonesia's wells are entering their declining
phase.
Oilfield production profile
25
Build Plateau phase
up
period
20
Declining
phase
15
10
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Oillifting(MBOPD)
Source: DBS Vickers, Company
The oil & gas production volume composition in a certain
contract area also indicates the concession working phase.
Indonesia's current concession is dominated by gas, and
according to oil & gas field production's rule of thumb, gas will
dominate the production portion at the end of production
phase.
We estimate current low cost producers' cash cost per barrel
(average US$20 per barrel), 70% of current existing producing
field, which are located on-shore, also will not sustain ahead
as further technology and effort to maintain the oil production.
We estimate the old well reactivation to take another US$5-
10/bbl of cash cost which means the production cost will be
close to or even beyond the offshore drilling cash cost of
US$40/bbl.
 Industry Focus
Oil & Gas

SKK Migas encourages PSC contractors to carry out Enhanced
Oil Activities both in the study and the Field Trial/Pilot Stage.
There were four trials/pilots in 2014 as below:
Kaji Surfactant Polymer, Medco E&P, completed in May
2014
Tanjung Surfactant, Pertamina E&P, completed in March
2014
Widury Polymer , CNOOC, expected to be completed in
2018
Old Rimau Electrical EoR, Medco E&P, expected to
complete in 2015
The pilot project has completed but we do not see the EOR
activities being fully implemented given their high cost and
reduced feasibility at the current crude oil price level, according
to our talks with contractors. Contractors prefer to maximise
negative earnings in the first decade of operations, implying
that every dollar invested in the project will be initially burning
cash.
Unconventional contract areas have stagnated in the past three
years, reflecting the challenges on the field. Indonesia's
unconventional contract areas rose from seven in 2007 to 66 in
2012, but they had stagnated until 2014. The development in
this contract is in line with global shale revolution in 2009-
2014. However, as the projects require huge financing with
unproven outcome in Indonesia, new contract proposals have
fizzled out, leaving behind the existing unfinished
unconventional contract areas.
Unconventional contract areas (contracts)
60
54 55 55 55

their remaining reserves, as long as they provide an acceptable 50

level of profitability to survive amid the currently challenging
40
situation.
30
23
Unconventional drilling technologies such as shale gas, tight 20
20
gas and CBM to exploit trapped oil in rocks. Hydraulics
fracturing will push bunch of water chemicals and sand into the 10 7
4
rocks, breaking them apart and releasing the trapped energy. 0
Combining the fracturing technologies with horizontal drilling 2007 2008 2009 2010 2011 2012 2013 2014

will provide better penetration to the energy-bearing rock. UnconventionalCA

Source: DBS Vickers, SKK Migas

Horizontal drilling and fracturing illustration
Enter Jokowi: Industry reform in progress, but seems to
be taking time
'Contract sanctity and clear tax regulations will be key factors
for the continuity of exploration and production activity'.
Moreover, 'significant/radical regulatory changes are required
to spur investments in exploration such as VAT & import
facilities, complete non-compliance with PTK 007 for
exploration activities, better fiscal terms (investments credit,
DMO and tax holidays), relaxation of expats' working permits
requirements' according to PWC 2015 oil & gas survey
participants' comments. The survey also showed that major
participants expect there to be no changes/reforms in
Indonesia's oil & gas sector.
Source: DBS Vickers, Greenlight Capital

Unconventional gas projects require extensive financing and

capital expenditure, mainly for technology and infrastructure.
Moreover, these projects also require a high crude oil price level
in order to be able to secure bank financing and government
support, in our view. Otherwise, at our long-term crude oil
price, the projects will be risky as operators potentially incur

Page 15
Industry Focus
Oil & Gas

Quality and usefulness of government regulations incentives to domestic and foreign contractors, in our view,
Deteriorate
Significantly unless crude oil price reaches above US$75 per barrel,
improve
16.0% 7.0% according to our estimate. We understand this is part of the
government's initiatives to protect, and meanwhile maximize
the benefit and national revenue from the national oil & gas
assets.
Improve
33.0%

There are also no relevant short-term incentives for the

upstream oil & gas industry, amid the low crude oil price in
order to keep the existing projects afloat and new investments
Remainthesame attractive. The government appears to be passive, resulting in
44.0%
very slow progress in industry reformation as per the new
government's election blueprint. The first stage of the reform, is
Source: DBS Vickers, PWC
by plan to dismiss Pertamina's overseas trading arm PT
Pertamina Energi Trading Ltd (Petral).
Indonesia's oil & gas production volume is the largest in However we see that the dismissal plan, which has been heavily
Southeast Asia, and the country has high production potentially exposed by the media as the key reformation of oil & gas
as large areas remain under-explored (mainly in the Eastern industry, will not significantly change the landscape of the
part of Indonesia) due to technical challenges on high CO2, national oil & gas industry unless, the reform also radically
deep-water and unconventional hydro carbon structure. streamlines the national oil & gas regulations and workflow,
which caused the major project bottlenecks in the past two
Foreign and domestic oil & gas contractors are also interested in decades.
Indonesia's oil & gas industry, mainly on its attractive
geographical area. Despite its challenges, the country also Moreover, Petral's major debtors and business partners are
offers an appealing risk-and-reward potential. Indonesia's national oil companies such as Pertamina and CNOOC. Hence,
environmental rules and regulations are also not as complicated the dismissal will also mean disappearing potential income and
as those of the developed countries. thus, we also believe the dismissal progress will be challenged
by some parties, including the House of Representatives.
Oil production ('000 BOPD)
900
The government's plan to raise fuel storage capacity amid the
800
upstream sector transformation also signals that the
700
government expects the upstream oil & gas transformation
600
progress to be challenging and slow. We understand the
500
government's plan is positive for Indonesia's energy security to
400

300
extend Pertamina's fuel reserves to 30 days from 22 days.
200
However, without parallel transformation work from the
100 upstream side, we only see that the fuel storage capacity
0 expansion signals that Indonesia will continue to import fuel in
Indonesia Malaysia Thailand Australia Vietnam Brunei the short to medium term to fulfil its domestic demand.
Oil

Source: DBS Vickers, Company
In the paper, in order to unlock and exploit its oil & gas assets,
Indonesia should liberalise its oil & gas assets via partnerships
with both domestic and foreign contractors, who have better
access to financing, technology and proven execution track
record.
However, in reality, we see Indonesia's PSC scheme and overall
oil & gas regulations as being provide less support and
One-stop services via BPKM to only solve marginal
challenges
The new application is for a one-stop service via Indonesia's
Investment Coordinating Board (BKPM). The initiative is to
reduce the bureaucracy in applying for working permits and
provide a better investment climate mainly for foreign investors.
However, we think BKPM's one-stop service will only cover the
initial scope of permit and licensing, for new potential investors.
This policy does not specifically address the struggling, existing

Page 16

investors who are in the midst of obtaining approval via the old
procedures.
Moreover, the one-stop service policy also does not address the
new and existing investors' concerns such as the contract
renewal process. Investors under this phase face uncertainties
on asset valuation over Pertamina's intention to take over the
expiring PSC, and local government intervention during the
renewal process.
We estimate this one-stop policy to only reduce a quarter of the
bureaucracy layer but leaves the most challenging bureaucracy
barrier such as the local government's coordination with central
government. Moreover, we see investments and licensing as
being only the tip of the iceberg as shown in the previous chart
and table. We believe local government bureaucracy is
challenging as the coordination between local and central
government remains unclear.
The same concerns are also raised on the power plant project
licensing. So far, we do not see any strategy to strengthen the
coordination between local and central government and hence,
we think the streamlining process still has a long way to go.
Current PSC scheme, at current crude oil price range, is
unattractive for new oil & gas investments
Given the lack of expertise and financing on exploration and
execution, the government has structured a production sharing
contract with oil contractors. Indonesia was the first country to
introduce a structured production sharing contract in 1966.
The majority of the government's partners are foreign oil & gas
contractors given their expertise and technology in various oil
fields, both onshore and offshore.
Production sharing contract (PSC) is granted by Indonesian
government via SKK Migas to one or more contractors to
explore, develop and produce oil & gas reserves and resources
in designated working areas. The sharing contract work
structure is the oil companies act as the government oil and gas
third parties partners with pre-agreed allocation of oil
remaining after payment of cost oil.
Industry Focus
Oil & Gas
Indonesia's PSC scheme in chart
Source: DBS Vickers, SKK Migas
On the sharing portion, government will take 85% and 70%
share on an after-tax basis, leaving the rest for the contractors.
The production sharing contract is favourable to government, in
our view, as the government acts as a passive investor/landlord
with oil & gas ownership and let the contractors work with a
smaller sharing portion. The cost recovery scheme is also only
applicable if a particular oil field is granted commercial status.
Given the PSC term above and the <50% contractors' share,
we believe the current PSC scheme significantly reduces
Indonesia's oil & gas investment's attractiveness and
competitiveness amid the current low crude oil price, as
contractors are exposed to the downside risk, mainly in the
expensive pre-production stage.
We understand that the contractor is typically entitled to
recover its exploration and production costs. However, the cost
is only recoverable if the government ensures that a project is
guaranteed a certain desired return on investment and obtains
commercial status or otherwise the project should be
terminated.
Moreover, SKK Migas could also terminate the contract that
fails to secure new reserves, or if the newly proposed PSC
provides only a marginal return, in a certain timeframe
determined by the government. The contract recently
terminated was for Total's concession in South West Bird's
Head, Papua. The government will terminate 15 PSCs this year
after terminating 20 last year.
Page 17
Industry Focus
Oil & Gas

Contract area status (2014) revenue target to meet the national revenue and spending
Undergoing budget. Even without the PSC term revision, currently oil & gas
terminationCA
11.2% ExploitationCA
22.2%
revenue is projected to decline by 20% y-o-y to Rp20.2tn in
Approved
terminationCA FY16, after dropping by 45% y-o-y to Rp24.5tn in FY15.
2.2%

We believe the government will not sacrifice more revenue

streams from the natural resource sector as it recently halted
the royalty hike from thermal coal miners as per miners' request
for low commodity prices.

O&G and mineral & coal mining revenue (Rptn)

ExplorationCA 50 47.4
64.4% 42.9
45
Source: DBS Vickers, SKK Migas 40 37.3
35.2
35 32.7
29.3
27.7
Moreover, proposed PSC revision is marginal; we do not 30
24.6
25
see it enhancing oil & gas investments' attractiveness 20.2
20 16.4
Contractors are being offered as much as 35% of production 15
14.5
12.9 11.6
split for oil and 40% for gas, higher than the existing split of 10 7.8

15% and 30% respectively, in an attempt to attract investors. 5

Although there is no final draft on the proposal, we think this it 0

2010 2011 2012 2013 2014 2015F 2016F
is positive on paper as the current PSC scheme offers
unattractive returns to contractors at the current crude oil price, Oilandgas Mineralandcoalmining

or even at our long-term crude oil price assumption. Three key
options for PSC changes :
All costs will be recoverable. However, the government's
revenue split will be higher than the current portion
Gross split system. Contractors will not able to recover
their costs. However, they gain a larger revenue split until
their investments reach breakeven point, following which
the government's split will gradually widen.
Sliding scale system. Contractors costs are still recoverable.
However, the government's revenue split is progressive;
1% for oilfield with 5bn BBTUD threshold and the
government will charge a higher split if production exceeds
the threshold.
Source: DBS Vickers, various media
Pertamina plans to take over the expiring PSC, raising
uncertainties for existing and potential investors
Recently, the government appears to have taken over the
expiring PSC which also put Indonesia's oil & gas industry under
scrutiny. The Mahakam block takeover is also the government's
opportunity to boost national oil & gas income. This plan raises
uncertainties for new and existing investors. This also raises
doubts on the government's one-stop services via BKPM as we
had discussed previously, as we see this plan as being contrary
with sector liberalisation the partnership with contractors to
exploit national oil and gas reserves.

However, we see the higher revenue split to contractor being
only applicable at the early stage of the project before the
contractor reaches the breakeven point of their investments,
following which the government's revenue split will be widened
again. We think this proposal does not change the overall net
split between the government and contractors. It only manages
the timing of cash flows and help contractors to survive in the
current low crude oil price environment, mainly in the early
stage of development.
Although the final draft on the amendment has not been
released yet, we do not think there will be any radical changes
on the regulations as the government also has its own oil & gas
SKK Migas has also not completed valuing the assets of
Mahakam Block given its size, according to the media.
Uncertainties on oilfield asset values also put stakeholders
involved in contract renewal negotiations under uncertain
circumstances as the values of underlying assets they are
negotiating for are undetermined. This is means that the
negotiations will likely take a longer time.
The Mahakam block case also triggers uncertainties for
contractors in other oil fields. The existing PSC has eight years
of remaining life, which we think is relatively short considering
Indonesia's oil & gas operational phase's slow progress.
Moreover, according to SKK Migas, the average contract

Page 18

renegotiation should commence at the latest 10 years before
the contract expiration.
We expect the takeover plan to disappoint contractors as the
government will enjoy and continue the exploitation phase,
leaving the previous contractor to incur billion dollars' worth of
investments in the preliminary exploration stage.
We also see this action triggering foreigners' perspective
concerns on asset nationalisation and hinder new investments
in the sector, although at the first stage, Pertamina will grant
an option for a 30% stake to the existing PSC holder for a
smooth transition process.
Previously under PSC contract, Total and Inpex had a 50:50
share split and it is scheduled to expire at the end of 2017. But
the government has endorsed Pertamina to become the new
operator of the Mahakam block, taking over Total's role and
scheduled to start operating in January 2018.
The President has the final say on the future of the expired PSC
as seen in the Mahakam block case among Pertamina, Total
and Inpex. The Mahakam block currently produces around
1.6bn standard cubic feet, accounting for 25% of national
production.
Besides the central government's final decision, the local
government will also play a key role in share negotiation as in
the Mahakam case, the East Kalimantan governor was also
involved in the Pertamina share negotiation. Pertamina is
looking for a majority share of 70% and due to the size of the
block, Pertamina is asking Inpex to stay in Mahakam as a
partner with a proposed share of 30%.
Total EP's rejection of its share swap option with Pertamina's
overseas oil & gas assets further complicates the PSC contract
renegotiation. Total believes the current PSC reassessment itself
will take a very long time, while the share swap scheme also
poses a challenge mainly on valuation works.
Beyond the Mahakam case, media news flows also indicate that
Pertamina is also looking to take over another expiring block
like Cepu which is currently operated by Exxon Mobil and will
expire in 2018. Pertamina's rationale is to secure the gas
supply as Arun LNG facility will start to operate soon.
Previously, Arun's operations were halted in October 2014 as its
LNG export contract expired.
Unavailability of financing and technology expertise are
the key execution risks
The high investments required to fulfil Pertamina's aspirations
in both upstream and downstream segments raises questions
Industry Focus
Oil & Gas
on Pertamina's financing capability as the company's balance
sheet strength and earnings performance are also relatively
weak.
Based on Pertamina's sluggish financial performance, but high
capex plan in the next three years for both upstream and
downstream segments, we are doubtful on Petamina's
capability to take over the expired PSC from the existing
contactors. Lower crude oil price has also hit Pertamina's
financial performance as seen recently in 1H15. Pertamina EP's
revenue and net profit fell by 64% y-o-y and 38% y-o-y on
weaker oil price, while production of both oil & gas at 105.8
mbopd and 1,030 MMSCFD respectively, fell short of
expectations.
On the other hand, besides the plan to take over the upstream
expired PSC, Pertamina via Pertagas is also looking to expand
on the middle segment by developing its LNG storage facility
and distribution network around Indonesia with imported LNG.
Beyond the distribution and storage segments, Pertagas is also
considering the gas-fired independent power plant (IPP) project
business with key project of gas-fired power plant (PLTG) Jawa
1, Jawa 3 and Riau, partnering with foreigners. Pertagas first
attempt in power plant project also raises concerns as the
current power plant projects are facing multi-year delays on
land acquisition problems.
We understand that the government's plan is to increase
government presence via expanding Pertamina's role as the
largest national oil company after it dwarfed by the Law
22/2001. But on the other hand, we also think Pertamina
cannot afford the execution under the current PSC scheme, as
contractors will execute all the operations and equipment with
their own finances and expertise.
Struggling upstream oil & gas drillers also negatively
impact the whole supply chain
Challenging upstream oil & gas environment is also negative for
the supply chain, including downstream and distributors. Oil &
gas service revenue derives from contractors upstream
investment spending both in exploration and exploitation stage.
However, low crude oil prices have potentially halted oil & gas
investments in Indonesia further, after experiencing a flattish
growth trend in the past decade.
Indonesia's oil & gas service companies are in a fragmented
industry, where each players only has a single-digit market
share. This could potentially trigger a price war in contract fee
in order to win new contract tenders and maintain current
contracts in order to stay alive.
Page 19
Industry Focus
Oil & Gas

ELSA quarterly revenue trend PGAS historical distribution volume (MMSCFD)

1,400 25 Distributionvolume

1,200 20 900 852

824 807 824
792 800
800
1,000 15
700
800 10
579
600
600 5
500
400 0
400
200 (5) 300

0 (10) 200
1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15
100

0
Revenue EBITDAmargin
2008 2009 2010 2011 2012 2013 2014

Source: DBS Vickers, SKK Migas

Source: DBS Vickers, Company

The implication to oil & gas distribution business

Indonesia's oil & gas: from net exporter to importer
Upstream problems also raises difficulties for oil & gas
Amid the raising oil & gas demand, domestic oil & gas
distributors as it means the domestic oil & gas supplies will not
production peaked in 1995, and has then continuously trended
sufficiently catch up with the growing demand. As seen in
down. It has been missing its annual production target since
Perusahaan Gas Negara (PGAS, HOLD, TP Rp2,600), the largest
1998, given the lack of new exploration investments and
national natural gas distributor, its historical distribution volume
several execution issues on exploitation phase projects. Lack of
growth has stagnated in the past decade. PGAS cannot fully
financing, technology and bureaucracy hurdles are the key
monetise its infrastructure monopoly, premium distribution
issues on domestic oil & gas reserves monetisation.
spreads and captive market in Java and Sumatera. Please refer
to our PGAS full reinstatement coverage report Caught
Indonesia's oil & gas industry complication started from the
between a rock and a hard place, released 13 July 2015.
establishment of Law (UU) No. 22/ 2001 on upstream oil & gas.
This regulation dwarfed the national largest oil & gas company
We also believe oil & gas distributors are more likely to be
(NOC), Pertamina's role and add government entities called
subject to regulations mainly on the gas price, as distributors
Special Task Force for Upstream Oil & Gas Business Activities
have enjoyed a wide distribution spread in the past decade.
Republic of Indonesia (SKK Migas, formerly known as BP
Regulating the gas price in the upstream level could potentially
Migas). Changing business relationship from B2B to B2G raises
add further complexity as upstream contractors' scope of work
the complication of the industry, mainly on dealing with
has been written based on the PSC with the government.
bureaucracy before facing the fields' technical challenges.

Page 20
 Industry Focus
Oil & Gas

Indonesia's oil & gas production 1966-2016F

2000 Plateau stage
1st generation Law 22/2001 era
1800 PSC
1600

1400

1200

1000

800

600

400

200

0
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016F
Oil Gas

Source: DBS Vickers, IPA, SKK Migas

The increase of bureaucracy, besides the financing and Time to production (years)
technology hurdle, has caused domestic national oil & gas 18 17
lifting volume downtrend. Indonesia's peaked oil production in 16

1995 also triggered by the longer of time lag between the oil 14
findings and production startup. Indonesia's oil & gas 12
12

industry's timeline between discovery and production start-up 10

jumped from five years in 1970 to 17 years in 2000 and above. 8
6
6 5
We estimate technically, assuming lean permit and working
4
paper, each field only requires three years on average from
2
discovery to production start-up. Hence, the rest of the 14
0
years are dedicated to the non-field activity mainly on 1970s 1980s 1990s 2000s
administrative tasks. However, the time to production jumped
Source: DBS Vickers, IPA
significantly after the second generation and newer PSC. We
also believe second generation PSCs also contribute to the
Indonesian oil & gas production slowdown due to more Concurrent with extending production time, despite the
complicated nature of second generation PSC vs. the first downtrend on the oil & gas production volume, Indonesia's oil
generation as the government changed terms to ensure every & gas reserves replacement ratio has continued to drop since
field generated sufficient positive cash flow for the 2007. Latest oil & gas replacement ratio only reached 46.6%
government. and 90.2% respectively, which means that every year,
Indonesia's oil & gas reserves are depleting and if there are no
significant exploration discoveries, the country's oil & gas
reserves will evaporate.

Page 21
Industry Focus
Oil & Gas

Oil & gas replacement ratio (%) SKK Migas domestic oil & gas production forecast
350%
310%
300%

250%

200% 180%

150% 130% 127%

100% 82% 90%

62% 69% 63%
52% 47%
50% 32%35%
23%

0%
2007 2008 2009 2010 2011 2012 2013

Oil Gas

Source: DBS Vickers, IPA

Indonesia's exploration investment is also trending lower,

which means the reserves replacement ratio will stay below
Source: DBS Vickers, SKK Migas
100%, and the country's oil & gas reserves will continue to
deplete. Flattish trend in exploration investments in the last
Slow reform on oil & gas, negative impact to Indonesia's
five years implies limited new oil & gas findings.
macro-economy
Indonesia's oil & gas revenue account lower contribution to
Oil & gas investment trend
national total domestic revenue in year after year. Domestic oil
Expliration Development Production Administration
& gas sector government revenue only reach Rp212tn, 13% of
14,000
the state's total revenue in 2014. Oil & gas sector revenue
12,000 contribution to domestic revenue has been trending lower in
10,000 the past decade. Oil & gas revenue contributed 21.4% in 2004
8,000
and based on PWC's estimate, oil & gas revenue will only
contribute 5.1% in 2015.
6,000

4,000
Oil & gas revenue trend & % to domestic revenue
2,000
250 30%

25%
2009 2010 2011 2012 2013 2014 200

Source: DBS Vickers, IPA, SKK Migas 150

20%

15%
This also implies that Indonesia oil & gas production rate will 100
10%
continue to decline in the incoming years. SKK Migas itself
even believe that Indonesia's oil & gas production will continue 50
5%

to trend down. According to SKK Migas 2014 annual report,

0 0%
Indonesia's oil & gas production will decline by 300k BOEPD 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

per year in 2015- 2050. O&Grevenue %domesticrevenue

Source: DBS Vickers, PWC, SKK Migas

On the other hand, as Indonesia's oil demand grows amid the

oil producers' struggle to increase output, Indonesia has
started to import oil to fulfil the growing demand (see chart).
However, this strategy has proven to create an inferior national
trade balance, and burden the central government's spending
for economic growth. Hence, we think Indonesia's oil & gas

Page 22
 Industry Focus
Oil & Gas

slow reform will also negatively impact Indonesia's economic Shifting the contract scheme from B2B to B2G has proven to
situation. be ineffective as its means the cash flow and value
contribution from the Indonesian oil & gas activity will be less
Indonesia's oil production and consumption measurable and accountable, in our view, relative to a B2B
1,800 900 scheme via a limited liability, state-owned company.
1,600 800

1,400 700
The current B2G scheme means investors/contractors should
1,200 600
deal with the government entities, and not state-owned
1,000 500

800 400
companies. The government has full control on all the oil & gas
600 300 found in the country. This means investors should first
400 200 complete the bureaucracy matters before the first exploration
200 100 study.
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
The law also states that Pertamina, as a limited liability
Production Consumption Import
company (Perseroan Terbatas, PT), will only focus on its
Source: DBS Vickers, SKK Migas operations as an independent state-owned oil & gas company
and thus, forces Pertamina to compete with other domestic
Importing oil and maintaining a stable, reasonable retail fuel and international companies.
price amid the rising domestic oil demand means the
government subsidy will continue to burden the government's The Law dwarfed status of Pertamina as key single executor
budget. Energy subsidy to total spending reached 19% of the and supervisor of national oil and gas, and create a
government's total spending in FY14. Meanwhile, government entity called SKK Migas (previously BP Migas)
infrastructure accounts for only 8%. This contradicts the beyond Pertamina and take over its role. The law requires the
government's plan to boost infrastructure expansion in state-owned oil company to be treated like other privately-
Indonesia by allocating a large percentage of the budget for owned, independent ones, both foreign and domestic
energy subsidy. contractors. Since then, the relationship between the oil & gas
contractor and government has become a B2G (Business to
Percentage to total spending government) arrangement instead of a common B2B (Business
25% to business) joint venture.
21%
20%
20%
19%
19% In November 2001, Indonesia's parliament passed a new oil
15% and gas law to replace the previous law, Law No.44/1960 and
13%
No.8/1971 under criticism against it from a number of groups
11%
10% 10%
9% 10% such as national oil company, local government and
8% 8% 8%
environmental groups. The new law aims to scrap the
5%
monopoly of Pertamina and liberalise Indonesia's oil & gas
0% sector.
2009 2010 2011 2012 2013 2014

Energysubsidy Infrastucture The bill promises fundamental changes in the governance of

Indonesia's oil & gas industry by establishing two new
Source: DBS Vickers, IPA
government entities; implementing and regulatory bodies. The
implementing body is assigned to regulate the upstream sector
Oil and gas Law 22/2001; B2B to B2G, dwarf Pertamina's
and take over Pertamina's role on supervision and entities, to
role as largest national oil & gas company
work with foreign contractors ended and handed over to BP
That is our first impression we gathered from reading points in
Migas (Executing Agency for Upstream Oil and Gas Business
Law 22/2001. The law is structured to maximise government
Activities), which in 2012 the Constitutional Court (MK) issued
benefits as the upstream business activities, mainly on
MK Decision 36/2012, annulled articles of the oil & gas law
exploration of non-renewable natural resources of state assets,
relating to the authority, role and function of BP Migas,
and leaves contactors with a minority portion of the revenue.
therefore BP Migas ceased to exist. In the meantime, MK has
ordered all authority and responsibilities of BP Migas to be

Page 23
Industry Focus
Oil & Gas

transferred to the Indonesian government via Ministry of government has its own policy and plan to reform the industry.
Mineral Resources until a new oil & gas law is adopted. We think that is why in reality the time horizon is always
longer than investors expected.
Indonesia's oil & gas industry is one of the worst in the world,
according to Mr. Kurtubi, member of house of representative, Number of permits per operational stage
who is also an oil & gas industry reformation activist. Industry 120
107 109
participants, from survey to exploitation phase, will need to
100
submit more than 600k sheets of documents, complete with 85

customised terms and covering a multi-sectoral scope. 80

60
Number of permits
40
Permits 26
20 14
Ministry of energy and mineral resources 52
Ministry of finance 14 0
Preliminarysurvey Exploration Development Production Praproduction
Ministry of forestry 40
Permits
Ministry of transportation 58
Ministry of industry 3 Source: DBS Vickers, IPA
Ministry of trade 12
Ministry of Nakertrans 14 Indonesia's exploration-to-exploitation ratio, which indicates
the numbers of contract areas converted to exploitation stage,
Ministry of communication and informatic 11
dropped from 86% in 2012 to 40% in 2014. This means most
Ministry of defense 3
of the new exploration projects have not been converted to
Ministry of human right 4
the production stage. Hence, Indonesia's oil & gas industry
Indonesia National Army 2
growth will continue to rely on existing contract areas. We
Indonesia National Police 19 believe this is reflected by the number of permits as per
Ministry of agriculture (BPN) 3 previous chart, where most are in the development and
Local governor 35 production stages.
Local mayor 66
Nuclear energy regulatory 4 Exploration-to-exploitation ratio (%)
IUPHHK holder (private entities) 2 100%
90%
Total 341
80%
Source : IPA, DBS Vickers 70%
60%
This will negatively impact the monetisation of national oil & 50%

gas reserves, as it theoretically needs eight to 10 years from 40%

survey to exploitation stages. However, in reality, Tangguh, 30%

20%
Senoro, Masela and Banyu Urip Cepu took 16 years, 16 years,
10%
17 years and 10 years respectively before their initial 0%
commercialisation. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exploitation/explorationCAratio

We think the base case of eight to 10 years' time horizon itself Source: DBS Vickers, SKK Migas
is too long to deal with as Indonesia's average governmental
tenure is only five years. This means there are risks of rework
and delay in the government transition. This is not to mention
the potential regulation changes along the way as each

Page 24
 Industry Focus
Oil & Gas

Appendix

Indonesia PSC scheme

Revenue
100
20% FirstTranchePetroleum
20

EquityToBeSplit CostRecovery
65 15

NetRevenueToBeSplit
42.3077% 85
57.6923%
GovernmentShare ContractorShare
35.96 49.04

48%
TaxRevenue TaxPayment
23.54 (23.54)

TotalGovernmentShare NetContractorShare
59.50 25.50

TotalContractorShare
40.50

Source: DBS Vickers, Company

Indonesia PSC payment scheme

RevenueFromBuyer
100

PayingAgent
100

GovernmentAccount ContractorAccount
35.96 64.04

ReceivedTaxPayment TaxPayment
23.54 (23.54)

EndingBalance EndingBalance
59.50 40.50
Source: DBS Vickers, Company

Page 25
Industry Focus
Oil & Gas
Indonesia's product sharing contract agreement summary:
The contractor is responsible for both technical and
financial operations, while the equipment purchased by
the contractors become the property of SKK Migas.
Contractors do not pay any royalty but pay corporate and
dividend tax instead (total around 48% comprising 35%
of corporate tax and 13% of dividend tax, assuming 20%
payout ratio).
Contractors obliged for First tranche Petroleum (FTP),
deduction of production to guarantee government a
minimum share of the petroleum production. The
deduction is 20% of gross revenue prior to cost recovery
and will be shared between the government and
contractor.
Contractors must relinquish a portion of crude oil to fulfil
domestic market supply (DMO) 25% of contractors' share
before tax times lifting times price.
Key historical development of Indonesia PSC
The revolution of PSC from generation to generation has
become increasingly unfavourable to the contactors. The latest
oil and gas law 22/2001 requires the product sharing contract
granted by the government to be via SKK Migas instead of
Pertamina as the national oil company and this is the point
where Indonesia's exploration investments and oil production
start to gradually decline every year.
The first generation PSC (1966-1976) had the final
management by approving the Work Program, Budget and
Page 26
Plan of Development with Pertamina/contractor share of
67.5%/32.5% if the production level exceeded 75,000 barrels
of oil per day (BOPD).
Second generation PSC's basic principle remained the same
but the cost was calculated based on the accepted accounting
principles without a 40% ceiling (100% recovery). However, it
raised complications as to low crude oil price, high cost but
small reserve field might not provide income to the
government during its lifetime. To cope with this concern,
NOC created a new rule 'Declaration of Commerciality',
whereby a field could only be classified as commercial for
development if there was at least 49% of the cash flow for the
government. This raised concerns from the contractors as NOC
held the authority to determine whether an oil field is
commercial or otherwise. Operators could not recover their
costs for non-commercial oil fields.
Under the third generation PSC (1988-1999), the government
issued incentives to enhance oil exploration activities. The
government's minimum take was reduced to 75% from 85%,
while those for smaller fields in conventional and frontier areas
were reduced to 80% and 75% respectively. In 1988-1994,
the government issued a series of exploration incentive
packages to encourage new exploration in high-risk areas,
especially in the Eastern Part of Indonesia. The 1992 incentives
contained improvements to existing contracts to increase
exploration in high-risk frontier areas such as 125% incentive
credit for water depths in excess of 1,500 metres.
 Industry Focus Industry Focus
Oil & Gas Oil & Gas

List of expiring PSCs

Gas 1P
Oil 1P Reserve Production Contract
Reserve
(MTSB) (MBOPD) Expiry
Block Operator Stakeholders (BSCF)
Gebang Energi Mega Persada EMP 50%, Pertamina 50% 11.00 40.83 - 2015
Northwest Java Sea Pertamina PHE ONWJ 58.28%, EMP ONWJ 36.72%, Risco Energi 5% 75,330.00 315.50 41,168.46 2017
Mahakam Total E&P Indonesia Total 50%, Inpex Corp 50% 111,500.00 3,233.30 78,766.84 2017
Lematang Medco E&P Lematang Medco E&P Lematang 51.1176%, Lundin Lematang BV 25.8824%, Lematang E&P Ltd 23% 36.00 123.38 398.81 2017
Tuban JOB Pertamina - Petrochina East Java CNPC 12.5%, Pertamina 75%, Petrochina 12.5% 27.88 20.60 5,257.10 2018
Ogan Komering JOB Pertamina - Talisman (Ogan Komering) Talisman 50%, Pertamina 50% 3,191.00 18.80 2,746.48 2018
BP East Kalimantan 26.25%, Lasmu Sanga-Sanga 26.25%, Virginia Indonesia Co Llc 7.5%, OPICOIL
13,232.00 448.96 16,733.23 2018
Sanga-Sanga Vico Houston Inc 20%, Universe Gas and Oil Company 4.375%, Virginia International Co Llc 15.625%
CNOOC Ltd 65.54%, Pertamina 13.07%, KNOC 8.91%, Risco Energy 5%, Fortuna Resources
(Sunda) Ltd 3.77%, Talisman UK (Southeast Sumatera) Ltd 2.08%, Talisman Resources (Bahamas) 33,799.00 214.14 34,199.67 2018
South East Sumatera CNOOC SES Ltd Ltd 1.64%)
B Block ExxonMobil Oil Indonesia ExxonMobil 100% 3,343.00 104.00 2,408.81 2018
NSO Extention ExxonMobil Oil Indonesia ExxonMobil 100% 272.00 92.00 - 2018
Tengah Total E&P Indonesie PHE 50%, Total Tengah 22.5%, Inpex 22.5% w/ blok
1,000.00 38.10 2018
Mahakam
East Kalimantan Chevron Indonesia Company Chevron 92.5%, Inpex Corporation 7.5% 63,580.00 2,317.87 19,180.35 2018
Pendopo dan Raja JOB Pertamna Golden Spike Energy PT Golden Spike 50%, PHE Raja Tempirai 50% 13927
7.19 628.58 - 2019
Indonesia
Bula Kalrez Petroleum (Seram) Ltd Global Select 100% 2,168.00 - 413.44 2019
Seram Non Bula CITIC Seram Energy Limited CITIC Rescurces 51%, KUFPEC 30%, Gulf Petroleum 16.5%, Lion Energy 2.5% 6,170.00 - 2,758.78 2019
Jambi Merang Talisman Talisman 25%, Pertamina 50%, Pacific Oil and Gas Indonesia 25% 18,998.00 590.70 5,362.47 2019
Saith Jambi Blokc B ConaPhilips (Suth Jamti) Ltd ConccoPhlips 45%, Pertamina 25%, Petrochina Int Jambi 30% 38.00 5,782.00 - 2020
Brantas Lapindo Lapindo Brantas 50%, PT Prakasa Brantas 32%, Minarak Labuan Co Llc 18% 230.00 37.05 20.22 2020
Salawati Kepala Burung JOB PertaminaPetrochina Salawati PHE Salawati 50%, Petrochina Int KB 16.78%, RHP Salawati Island BV 14,51%, Petrogas (Island) Ltd
3,915.00 21.63 1,393.21 2020
18.7%
Malacca Strait EMP Malacca Strait S.A Kondur Petrcleum 34.46%, Malacca Petroleum ltd 6.93%, OOGC (Malacca Strait) Ltd 32,58%, PT
12,624.00 37.19 4,498.51 202
Imbang Tata Alam 26,03%
Makassar Strait Chevron Makassar ltd Chevron Makassar Strait 72%, PHE 10%, Tiptop Makassar 18% 1,860.00 23.35 3,342.07 2020
Onshore Salawati Basin Petrochina Intemational Bermuda Petrogas Basin 34,06%, RH Petrogas 25,94%, Petrochina 30%, Pertamina 10% 28,112.00 59.96 4,993.19 2020
Bentu Segat Kalla (Bentu) Ltd EMP Bentu Ltd 100% - 119.40 270.48 2021
Rokan PT Chevron Pacific Indonesia Chevron 100% 1,174,262.00 77.13 283,767.19 2021
Selat Panjang Petroselat Ltd PT Petronusa Bumibakti 51%, Petrochina Int Selat Panjang 45%, Intenational Mineral Resources 4% 4,385.00 52.73 474.30 2021
Tarakan East Kalimantan PT Medco E&P Tarakan PT Medco E&P 100% 2,367.33 16.24 1,813.73 2022
Coasta Plains and Pekanbaru Pertamina PHE 50%, PT Bumi Siak Pusako 50% 61,512.00 - 13,098.46 2022
Muturi BP Muturi Holding BV BP Muturi Holding 1%, CNOOC Muturi 64.77%. Indonesian Natural Gas Resources Muturi Inc
- 3,965.20 - 2022
34,23%
Bengkal MontD'Or MontD'Or Oil Tungkal Ltd 70%, Fuel X 30% 809.00 6.72 858.03 2022
Sengkang Energy Equity Epic (Sengkang) Pty ltd Energy Equity Epic (Sengkang) PTY Ltd 100% - 387.51 232.89 2022
Corridor ConocPhilips Grissik Ltd ConocPhilp (Grissik) Ltd 54%. PHE Corridor 10%, Talisman Corridor 36%, 35,858.00 4,785.94 13,774.46 2023
Rimau Medco E&P Indonesia Medco E&P Ranau 95%, Perusahaan Dareah Pertambangan Energi 5% 30,540.00 22.71 11,491.36 2023
Wiriagar BP Wiriagar Ltd BP Wiriagar 37,6%, Talisman Wiriagar 42,4%, K.G. Wiriagar Petroleum 20% - 1,035.70 - 2023
Jabung Petrochina Intemational Jabung Ltd Petrochina Jabung 42,86%, Petrogas Carigali 42,86%, Pertamina 14,29% 29,371.00 342.43 15,898.71 2023
Bangko Petrochina International Bangko Ltd Petrochina Intemational Bangko Ltd 100% 9,610.00 26.21 8.62 2025
Source : Media, DBS Vickers

Page 27
Industry Focus
Oil & Gas

Company Profiles

Page 28
 Indonesia Company Focus
Medco Energi
Bloomberg: MEDC IJ | Reuters: MEDC.JK Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 Dec 2015

HOLD Rp760 JCI : 4,374.19 Low cost driller

(Initiating Coverage) Single digit EBITDA growth outlook
Price Target : 12-Month Rp 820
Reason for Report : Initiating coverage Low cost structure helps profitability
Potential Catalyst: Crude oil price outlook
Expansion scale-back positive for cash-flows
Analyst Initiate coverage with Hold and TP of Rp820
William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com
In defensive mode. We forecast 2% EBITDA CAGR in
FY15-17 on relatively flattish trends for oil and gas
lifting volumes. We believe cash cost per barrel will be
Price Relative
Rp R e la t iv e In d e x
stable as Medco energy (MEDC) will rely on its current
4 ,1 8 4 .0
204
existing profitable reserves to maintain stable
3 ,6 8 4 .0

3 ,1 8 4 .0
184
164
operational profitability. However, MEDCs long term
2 ,6 8 4 .0
144
124
earnings outlook depends on its capability to enhance
2 ,1 8 4 .0 104 current existing reserves, finding new reserves or
84
monetizing its overseas assets which are definitely
1 ,6 8 4 .0
64
1 ,1 8 4 .0
44
6 8 4 .0 24 worth more than its existing concession.
D e c -1 1 J a n -1 3 J a n -1 4 J a n -1 5

M e d c o E n e r g i In t e r n a s io n a l ( L H S ) R e la t iv e J C I IN D E X ( R H S )
Expansion scale-back, cash-flows and balance
Forecasts and Valuation sheet are key priorities. We assume that MEDC will
only spend half of its capex guidance of Rp1tn in FY15-
FY Dec (US$ m) 2014A 2015F 2016F 2017F
17 as it focuses on its near term strategy to strengthen
Turnover 751 590 578 593
EBITDA 259 183 195 215 its balance sheet and cash flows. MEDC will postpone
Pre-tax Profit 111 6 10 6 the development of its unprofitable overseas assets and
Net Profit 10 4 6 4 cut investments in exploration projects.
Net Pft (Pre Ex.) 10 11 6 4
EPS (Rp) 40.4 16.7 25.6 16.6
EPS Pre Ex. (Rp) 40.4 46.2 25.6 16.6 Initiate coverage with Hold and target price of
EPS Gth (%) (73) (59) 53 (35) Rp820. We initiate coverage with HOLD rating and
EPS Gth Pre Ex (%) (73) 14 (45) (35) target price of Rp820 (6.9x FY16 EV/EBITDA; 0.2x P/BV).
Diluted EPS (Rp) 40.4 16.7 25.6 16.6
Net DPS (Rp) 21.2 0.0 5.1 1.7 MEDCs valuation is undemanding but prospects for oil
BV Per Share (Rp) 3,836.6 3,944.6 4,235.6 4,448.7 and gas lifting and earnings growth is subdued given
PE (X) 18.7 45.2 29.5 45.5 the low crude oil prices.
PE Pre Ex. (X) 18.7 16.3 29.5 45.5
P/Cash Flow (X) 1.1 1.9 1.5 1.4
EV/EBITDA (X) 3.2 5.1 5.3 4.9
Net Div Yield (%) 2.8 0.0 0.7 0.2 At A Glance
P/Book Value (X) 0.2 0.2 0.2 0.2 Issued Capital (m shrs) 3,332
Net Debt/Equity (X) 0.7 0.8 0.8 0.8 Mkt. Cap (Rpm/US$m) 2,514,927 / 179
ROAE (%) 1.1 0.4 0.6 0.4 Major Shareholders
Encore Energy Pte Ltd (%) 47.0
Consensus EPS (Rp): 1,403.8 8,422.8 11,230.4 PT Medco Energi International 7.0
Other Broker Recs: B: 1 S: 2 H: 4
UBS AG Singapore PT Medco 5.0
ICB Industry : Oil & Gas Free Float (%) 41.0
ICB Sector: Oil & Gas Producers Avg. Daily Vol.(000) 1,645
Principal Business: Integrated energy company, explores and
produces oil and gas both in Indonesia and internationally

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P.

ed: TH / sa: MA
 Company Focus
Medco Energi

Investment thesis

We initiate coverage with Hold rating and target price of Oil ASP (US$ per barrel)
Rp820 per share, implying 6.9x FY16 EV/EBITDA. We see 2% 140

EBITDA CAGR in FY15-17 on modest oil and gas production 120 113.7 115.6
108.3
volume growth. We believe MEDCO will only focus on its 100
97.8

existing low cost reserves mainly in Rimau and South

80
Sumatera. 55
60 50 52

Revenue, EBITDA and net profit 40

1,000 45% 20

900 40% 0
800 35% 2011 2012 2013 2014 2015F 2016F 2017F
700
30% OilASP
600
25%
500 Source: DBS Vickers, Company
20%
400
15%
300 However, unlike the oil ASP, which is marked to market, we
10%
200
assume MEDC will sell its gas in the domestic market to gas
100 5%

0 0%
distributors and end users. Gas prices are sealed under a
2011 2012 2013 2014 2015F 2016F 2017F contract between buyers and sellers after considering the
Revenue EBITDA Netprofit EBITDAmargin volumes to be transacted. Hence, we assume MEDCs gas
ASP is adjusted up by 3% p.a. in our forecast. We also believe
Source: DBS Vickers, Company
this is fair, as seen in PGAS business model, where
MEDC's earnings trend is in-line with our crude oil benchmark distributors enter into a contract to lock in upstream natural
price forecast trend as we expect relatively flattish volume gas prices, and determine the distribution spreads before
expansion ahead. Meanwhile MEDCs profitability is expected to selling it to end industrial uses.
remain relatively stable thanks to its low cash cost per barrel
Gas ASP (US$ per MMBTU)
and conservative management strategy. MEDC will rely only on
its profitable fields, and not pursue aggressive volume 7.0

5.9 6.0
expansion at current crude oil prices. MEDC's 9M15 financial 6.0 5.6 5.7
5.1
and operational performance reflected the impact of lower 5.0

realised price of US$53.51 per barrel (-49.7% q-o-q) and 4.0 3.8
4.0

US$106.3 per MMBTU (-2.1% y-o-y) given the lower

3.0
benchmark crude oil prices. Oil lifting and gas sales volumes are
expected to be weaker as MEDC prefers to be conservative, and 2.0

looks to maintain profitability amid the current challenging 1.0

environment. 0.0
2011 2012 2013 2014 2015 2016 2017

Pricing forecast trend is in line with our benchmark price GasASP

forecast, with discount imputed

We assume oil ASP will reach US$55 per barrel in FY15 (-44%
y-o-y) and US$60 per barrel in FY16 and thereafter. Our ASP
trend is in line with our in-house crude oil price assumption
outlook, however, we have conservatively imputed a US$3-5
per barrel discount to our ASP calculation which we believe is
fair after considering on the impact from selling price
negotiations.
Source: DBS Vickers, Company
Oil and gas lifting activity to focus on existing profitable
reserves
We align our forecast in line with managements strategy to
focus on its most profitable concession for both oil and gas
lifting activity. This is implies MEDC will maximize its current
profitable reserves like Rimau (crude oil) and South Sumatra
(natural gas), and cut production from its less profitable
fields, which are mainly from its overseas assets. We also

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 Company Focus
Medco Energi

believe MEDC will maintain relatively stable level of We believe Rimau will be able to maintain stable production
profitability through this strategy. momentum given MEDCs Enhancement Oil Recovery (EOR)
program in the Rimau block. Current EOR program is
Oil and gas reserves per region focusing on the Kaji-Semoga block as a pilot project, and it
expected to be applicable on whole Rimau block in. MEDC is
also implementing unconventional oil and gas in 34 work-
over wells including artificial lifting and fracturing. In
addition, MEDC will conduct drilling for one horizontal well
with multiple fracturing at Telisa field. We believe Rimaus
low cost structure enable MEDC to execute its oil production
enhancement program.

On the other hand, we assume lower overseas and domestic

oil production volume on less then less economical lifting
activity. For exploration stage assets, both domestic and
overseas development will remain idle as we believe it is not
feasible to develop the blocks into the next stage at current
Source: DBS Vickers, Company
level of oil price. This is also in line with managements
strategy to maintain strong cash flows and balance sheet,
Oil and gas revenue will remain the largest contributor to
which should result in lower capex on exploration activities.
MEDCs consolidated revenue followed by other supporting
businesses like thermal coal and power plant. Gas will lead
Oil lifting forecast (BBOPD)
the modest growth on MEDCs top-line driven by both lifting
35.0
volume and ASP. 30.4 29.8
30.0
26.3
Oil and gas lifting revenue (US$mn) 25.0
22.2 22.0
20.9 20.9
1,000
20.0
873
900 827
800
800 15.0
701
700
10.0
600 553 545 560

500 5.0
400
0.0
300
2011 2012 2013 2014 2015F 2016F 2017F
200
Oil
100

2011 2012 2013 2014 2015 2016 2017
Source: DBS Vickers, Company
Oilandgasrevenue
We also assume the same trend for natural gas lifting
Source: DBS Vickers, Company volumes; natural gas lifting will reach 120 BBTUD in FY15 (-
15% y-o-y) before gradually growing by 3% y-o-y thereafter.
We believe Rimau and South Sumatra, which are MEDCs MEDCs long term growth driver will be supported by its gas
most profitable concessions, will continue to be growth reserves at both South Sumatra and Senoro-Toili, which
drivers for oil production. The Senoro-Toili block which account for 86% of MEDCs natural gas reserves.
completed this year also will contribute to gas production
volume. It started to supply gas for Donggi-Senoro LNG
(DSLNG) plant starting mid-June 2015. Rimau and South
Sumatra account 21% and 23% of MEDC's total oil and gas
daily production volume (BOED) respectively.

Current reserves imply Rimau has five years of reserves life

left. However, since not all oilfields are profitable at the
current crude oil price, we forecast MEDCs crude oil
production rate trend will be flat this year at 22 MBOPD in
FY15, before a slight drop of 6% in FY16 and flat thereafter.

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 Company Focus
Medco Energi

Gas production volume (BBTUD) EBITDA margin (%)

180 45%
163 160
154 39%
160 40% 38%
141 35%
140 35% 33% 34% 33%
124 127 32%
120
120 30%
100 25%
80 20%
60 15%
40 10%
20
5%
0
0%
2011 2012 2013 2014 2015F 2016F 2017F
2011 2012 2013 2014 2015F 2016F 2017F
Gas
EBITDAmargin

Source: DBS Vickers, Company Source: DBS Vickers, Company

Small contribution from non-majority investments On the other hand, we do not rely our forecast and valuation
We forecast income from jointly controlled entities to be flat on net earnings, as we prefer EBITDA metrics which reflect on
at US$7m, which is equity accounted. The largest contributor MEDC core operational performance. MEDCs bottom-line is
is Api Metra Graha (oil and gas services), followed by Medco sensitive to refinancing options for its existing debt and other
Power Indonesia (utilities) and Kuala Langsa (Blok-A, oilfield). one-off charges, and the potential of its reserves given the
The business outlook for MEDC's non-controlled investments current crude oil price environment which would affect the
is stable as seen in their historical performances. We assume economic value of its reserves, such as assets
flat earnings from Donggi Senoro LNG (DSLNG). We also impairment/revaluation, gain/loss on non-core assets
believe the value of MEDCs downstream investments will discontinuation. MEDC booked loss of US$17.5m in 1H15
remain only marginally visible given the equity method due to a one-off charge of US$22m from assets in the East
accounting (jointly controlled investment income). Cameron area under Medco Energi US LLC as the contract
had expired on 31 May 2015.
Jointly controlled investment income contributors
KLL
1.1%
Oil and gas lifting cash cost per barrel (US$ per barrel)
20
18
18 17
16 16
MPI 16
33.8% 14
14 13
12
12
10
8
6
AMG 4
65.2%
2

2011 2012 2013 2014 2015F 2016F 2017F

Liftingcostperbarrel
Source: DBS Vickers, Company
Source: DBS Vickers, Company
We believe MEDC profitability will be stable and EBITDA
MEDC will focus on most profitable reserves despite the long
margins will be steady at 35% in the next three years. This is
life of its reserves
in line with managements strategy of focusing on
We assume MEDC oil and gas exploration project will at least
efficiencies, however, volume expansion growth is expected
maintain its reserves life index at FY14s level or 17 years (2P
to be low. We believe MEDCs cash cost per barrel will
reserves), which implies a reserves replacement ratio of 100%
gradually go up as MEDC needs to enhance its existing
until 2018F. The reserves replacement ratio is a combination
profitable reserves (EOR program) as its overseas reserves are
of slow production volume expansion, reserves enhancement
not economically feasible at the current crude oil price level.
program and exploration activity. However, for the terminal
MEDC also employs local professionals on its oil fields which
year, we have conservatively applied 13 years of reserve life,
we believe its more economical than expatriate.
which reflects the scaling back of MEDCs exploration
investment.

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 Company Focus
Medco Energi

We estimate that reserves will expand from MEDCO EOR and Strong balance sheet and cash flows on capex cut; but third
horizontal drilling on Rimau Blocks. On the South Sumatra party financing still forms the backbone of its balance sheet
block, we believe Lagan-1A wells will start producing after a We assume 40% lower capital expenditure for the next three
series of production testing procedures are carried out. We years vs. MEDCs guidance during its management
also believe current 2D and 3D seismic data acquisition will presentation, implying US$230m average per year. We
support the development of new reserves. believe MEDC will scale back its early stage development
projects mainly on its overseas assets in Yemen and Tunisia,
Oil and gas reserves life (years) both are still in the early development stage. The lower
20 capex will help MEDC to maintain a healthy balance sheet.
18
18 17
16
17 We expect debt to equity ratio will be stable at 1.0x-1.2x.
16
14 14 14
14
12
12
11
Capex forecast vs. management target (US$mn)
10 500 470
8 456
8 450 417
6 400
350 335 325
4 318
2 300
0 250 224 230
201
2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 200 176

Reserveslifeindex 150
100 75
Source: DBS Vickers, Company 50

Muted growth in coal mining business 2011 2012 2013 2014 2015F 2016F 2017F

Beside power plant and oil & gas services business, MEDC Capex Guidance

also owns two coal mining work permits (IUP) acquired in Source: DBS Vickers, Company
2009 via PT Duta Tambang Rekayasa and PT Duta Tambang
Sumber Alam with probable coal reserves of 4m tons and 1.7
MEDC will continue rely on third party financing as its will
m tons respectively . The negative growth for coal business
only generate marginal FCFF relative to its debt maturity
revenue was mainly due to weak coal ASP based on the
profile. Weak crude oil prices will lead to weaker cash flow
downtrend of coal benchmark prices.
generation, while some capital has been allocated for certain
under-developing projects. This is implies MEDC will continue
We assume long term thermal coal ASP of US$57 per ton, in
to rely on its capability to find alternative financing options in
line with our in-house long term benchmark thermal coal
order to stay profitable.
price assumption of US$67 per ton, and that production will
remain flat at 582 tons. At this level of coal prices, MEDCs Maturing debt vs. FCF (US$m)
cash margin is around US$8 per ton, which translates into
350
relatively minimal earnings contribution to MEDCs 300 283
300
262
consolidated earnings. 250
200

Coal production volume (tons) 150

105 102 103 100
100
50
43.0 50
45 2

40 36.2
35
(50)
(45)
30 (100)
(87)
25 22.8 22.8 (150)
19.2 2015F 2016F 2017F 2018F 2019F
20
15 FCF Maturingdebt
9.1
10
5 Source: DBS Vickers, Company
0
2012 2013 2014 2015F 2016F 2017F

Coalproduction volume

Source: DBS Vickers, Company

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 Company Focus
Medco Energi

SWOT Analysis

Strengths
Competitive cost structure. MEDCs low cash cost per barrel
helps the company to stay afloat amid the low crude oil price
environment. MEDCO cash cost will continue to stay low as it
will only focus on utilising its most profitable domestic oil and
gas fields.
Undeveloped reserves. MEDC has 17 years of oil and gas
reserves - 65% domestic and 35% overseas. This means
MEDC could minimise its exploration investments if necessary.
Weakness
Remote assets. Long term growth depends on MEDCs
capability to monetise its overseas assets and the eastern
part of Indonesia oil and gas assets. Low crude oil prices
reduces the operating feasibility at its overseas assets.
Leveraged balance sheet. MEDC is continuously looking
for cheaper financing alternatives; US$230m debt will
mature per year in the next three years as.

Proven track record management. MEDCs senior

management has a sound track record in developing MEDC
since its listing in 1994. Understands Indonesias oil and gas
industry.

Opportunities
M &A potential. The challenging oil and gas sector could
potentially trigger industry consolidation and provide M&A
opportunities to MEDC, backed by its relatively strong balance
sheet and low gearing level.
Supporting business. MEDCs power plant subsidiaries can
potentially become big contributors as the development is in
line with the government 35,000 MW power plant mega
project
Threats
Crude oil price outlook. If the crude oil price trades at
levels lower than our assumption, this could adversely
impact MEDC earnings growth and profitability
Industry regulation. Slow reform in Indonesias oil and gas
sector will negatively impact MEDC as it will be harder to
find new reserves and business.

Source: DBS Vickers

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 Company Focus
Medco Energi

Company Background

Corporate History. MEDC was established in 1980 as an
Indonesia drilling contractor, and became an oil and gas
exploration and production company in 1992. After listing on
the IDX in 1994, MEDC expanded its exploration and
production activities with the acquisition of an interest in the
Rimau block in 1995, followed by the subsequent discovery
of the Kaji and Semoga oil fields in the same block in 1996.
MEDC acquired 100% of Stanvac Indonesia from
Exxon/Mobil. Since 2000, MEDC acquired additional blocks
within Indonesia and outside Indonesia.
MEDCs oil and gas activities consist of 33 blocks in various
stages of production, development, and exploration in
Indonesia, Libya, Oman, Papua New Guinea, United States,
Tunisia and Yemen. MEDC 11 Indonesia consists of 6
producing blocks under PSC with SKK Migas. Beyond its
upstream business, MEDC also owns power plants under PT.
Medco Power Indonesia.

Sales Trend Profitability Trend

US$ m
US$ m
900 10.0%
800 203
5.0%
700
600 0.0% 153
500
-5.0%
400
103
300 -10.0%
200
-15.0% 53
100
0 -20.0%
3
2013A 2014A 2015F 2016F 2017F 2013A 2014A 2015F 2016F 2017F

To tal R even u e Reven u e G ro wth (% ) (YoY) O p e ra tin g E B IT P re ta x P ro fit N e t P ro fit

Source: Company, DBS Vickers

Company structure

Source: DBS Vickers, Bloomberg Finance L.P.

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 Company Focus
Medco Energi

Indonesia oil and gas production 1966-2016F

Source: DBS Vickers, Bloomberg Finance L.P.

Indonesia oil and gas production 1966-2016F

Source: DBS Vickers, Bloomberg Finance L.P.

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 Company Focus
Medco Energi

Management Composition. MEDC's senior management based operations. Management has a proven track record to
team has an average 30 years of experience in exploration guide the company in its daily operations and also to look at
and production of oil and gas in Indonesia and overseas. It potential acquisitions of new assets.
has good local knowledge on Indonesias exploration and
production operators and its good relations with the
government also provides support o MEDCs Indonesian

Key Management Team

Name Current appointment Experiences

Hilmi Panigoro President Director Indonesian citizen. Joined Medco Group in 1997. Took MBA Core
Program at Thunderbird University, Arizona, USA in 1984 and received
MSc from Colorado School of Mines, USA in 1988. Graduated from
Bandung Institute of Technology in Geological Engineering in 1981.
Joined Medco Energi as Vice President in 1997 and became a Director
of the Company from 1998 - 2001. Appointed as Chief Executive
Officer of PT Medco Energi Internasional in 2001 and presently he is
also serving as Director and Commisioner in several of Medcos
subsidiaries
Roberto Lorato Director, Chief Executive Officer Over a period of some 30 years, Roberto has gained
extensive experience in the international O&G industry through a
variety of roles - from project economics to business development to
general management - in Italy, West Africa, Russia, Central Asia, the
UK and SE Asia. As President of Premier Oil Indonesia (2010-15),
Managing Director of Eni Indonesia (2006-09), President & CEO of
VICO (2003-06) and Managing Director of Agip, UK (2001-02), he has
successfully managed the reorganisation of large and complex
activities. Since 2006, Roberto has also been an active member of the
IPA Board of Directors and was elected President of the Association for
the years 2008 and 2009.
Anthony Mathias Director, Chief Financial Officer Tony has worked in the O&G Industry since 1994 in a variety of
positions in Strategy, Portfolio and Risk Management, Business
Improvement, post-acquisition company integration, Finance and
Planning. He gained this experience while working in a several
international locations and fiscal regimes in both the UK and
Norwegian North Sea, Houston Texas, Calgary Canada, Ho Chi Min
Vietnam and Jakarta Indonesia. Firstly with Mobil Oil, then
ConocoPhillips and most recently Premier Oil. Tony has held the
position of Vice-President Finance and IT with Premier Oil since 2012.
After university Tony began his career as an Engineer with GEC
Marconi in 1988 before joining PriceWaterHouse in 1990.
Ronald Gunawan Director, Chief Operating Officer Over a period of 27 years, Ronald has gained extensive experience in
the national and international O&G industry through a variety of roles -
from field operations, subsurface, project management, and asset
management to general management - in Indonesia, Australia and Italy.
As VP Operations & Development of Premier Oil Indonesia (2014-15),
President & General Manager of Hess Indonesia (2012-14), various
management positions in operations and projects with Eni Australia and
Eni E&P (2007-2012), and VP Assets of Vico Indonesia (2002-2006), he
has well rounded experience in managing both newly developed and
mature complex assets in onshore and offshore.
Source: Company

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 Company Focus
Medco Energi
Competitive Strengths
Management team with proven track record. Execution
is the key issue in Indonesias oil and gas industry.
Relationships with government and understanding the local
culture are also plus points in running businesses in
Indonesia. Management has been able to navigate the
company amid domestic regulations, bureaucracy and
technical challenges.
Low cost structure. MEDCs average lifting cost is US$15
per barrel thanks to employment of local professionals. A
lower cost structure guarantees positive EBITDA from current
operating reserves which would help MEDC to maintain its
balance sheet and cash flows.
Large undeveloped reserves base for future production.
MEDC has 1P and 2P oil and gas reserves of 216.66 MMBOE
and 290.04 MMBOE respectively, implies a reserve life of 17
years.
Growth Strategies
Focus on profitable reserves. MEDC will focus on its
profitable on-shore oil and gas reserves which has low cash
cost per barrel relative to offshore and overseas projects.
Strengthening balance sheet and cash flows. MEDC will
scale-back its capex for three years and focus on
strengthening its balance sheet and cash flows.
Management is prepared for the worst case scenario.
Management has prepared an operational and financial
strategy based on crude oil price of US$40 per barrel. This is
to provide a high degree of comfort to shareholders and
creditors that it should be able to sustain operations and cash
flows.
Key catalyst
Successful refinancing. MEDC continue to search for
more competitive financing options to cope with the low
crude oil price environment. Lower financing cost will support
Page 38
MEDCs earnings outlook amid modest oil and gas volume
growth and ASP.
Non-core assets divestment. MEDC may also potentially
divest its non-core assets and unprofitable fields as part of its
strategy to strengthen its balance sheet and cash flows. As
part of this strategy, MEDC has divested its ethanol business.
Faster than expected oil and gas industry reform. If the
oil and gas reform by the government is faster than expected,
it should be positive for Indonesias oil and gas industry. This
holds re-rating potential for listed Indonesia oil and gas
related companies.
Key risks
Crude oil price. If the crude oil price dips below our crude
oil price range, the impact on Indonesias oil and gas
industry could be larger than expected. This would
translate into lower ASP for MEDC, and hence lead to
weaker than expected earnings growth
Execution risk. Our earnings forecast also depends on
MEDCs execution capability to maintain low cash cost per
barrel, enhance its depleted existing reserves and successful
exploration investments.
Worse than expected oil and gas lifting performance. We
assume natural gas production volume would still be able
to offset the oil production volume going forward. If MEDC
cuts natural gas production, its operational and financial
performance will be below what we expect.
Oil and gas reserve and resource. Oil and gas reserve and
resource estimates depend on various assumptions that
may be inaccurate, with the main impact from crude oil
price assumption. Moreover our target price implies MEDC
will be able to fully monetise its remaining 13 years reserve
life in the terminal year.
 Company Focus
Medco Energi

Key Assumptions Sensitivity Analysis

2016
FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
O & G prod volume Net Profit +/-
Oil production (MMBOPD) 29.8 26.3 22.2 22.0 19.8 18.8 +/- 1% 1.5%
Oil ASP +/- 1% Net Profit +/- 2%
Gas production (BBUPD) 153.9 159.8 141.4 120.0 123.6 127.3

Crude oil ASP (US$/bbl) 115.6 108.3 97.8 50.0 52.0 55.0
Lifting cost (US$/bbl) 13.0 14.0 16.0 16.0 17.0 18.0
Capex (US$mn) (165.5) (308.0) (229.6) (274.6) (201.3) (127.7)

Segmental Breakdown
FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
Lower ASP but marginal
Revenues (US$ m) production volume
growth to drive earnings
Oil and gas sales 873 827 701 553 545 560 growth
Chemicals and other
9 43 36 24 20 20
petroleum products sales
Services 27 17 13 13 13 13
Total 909 887 751 590 578 593
Operating profit (US$ m)
Oil and gas sales 228 268 255 190 210 217
Chemicals and other
(4) (14) 15 3 9 8
petroleum products sales
Services (4) (1) (2) (7) 5 5
Total 220 253 268 185 224 230
Operating profit Margins (%)
Oil and gas sales 26.1 32.4 36.4 34.2 38.5 38.7
Chemicals and other
(47.1) (33.4) 42.1 13.8 43.7 39.8
petroleum products sales Profitability relatively stable
Services (13.3) (3.3) (18.0) (56.6) 37.9 39.8 on low lifting cost

Total 24.2 28.6 35.7 31.4 38.7 38.8

Source: Company, DBS Vickers

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 Company Focus
Medco Energi

Income Statement (US$ m) Margins Trend

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F 30.0%

25.0%
Revenue 909 887 751 590 578 593
20.0%
Cost of Goods Sold (513) (522) (480) (378) (389) (406)
15.0%
Gross Profit 396 365 271 212 189 187
Other Opng (Exp)/Inc (148) (116) (106) (115) (113) (106) 10.0%

Operating Profit 248 249 165 97 76 81 5.0%

Other Non Opg (Exp)/Inc 0 0 0 (22) 0 0 0.0%

2013A 2014A 2015F 2016F 2017F
Associates & JV Inc 1 9 7 8 8 8 Operating Margin % Net Income Margin %

Net Interest (Exp)/Inc (74) (65) (61) (70) (74) (83)

Exceptional Gain/(Loss) 6 0 0 (7) 0 0
Pre-tax Profit 181 192 111 6 10 6
Tax (156) (154) (98) (2) (3) (2)
Minority Interest (6) (3) (4) 0 0 0
Preference Dividend 0 0 0 0 0 0
Net Profit 18 35 10 4 6 4
Net Profit before Except. 12 35 10 11 6 4
EBITDA 347 358 259 183 195 215
Growth
Revenue Gth (%) 11.2 (2.5) (15.3) (21.4) (2.0) 2.6
EBITDA Gth (%) 28.6 3.1 (27.6) (29.2) 6.3 10.3
Opg Profit Gth (%) 21.8 0.4 (33.7) (41.0) (21.9) 6.6
Net Profit Gth (%) (79.6) 94.4 (72.5) (58.7) 53.3 (35.2)
Margins & Ratio
Gross Margins (%) 43.6 41.1 36.1 36.0 32.6 31.5
Opg Profit Margin (%) 27.3 28.1 22.0 16.5 13.1 13.6
Net Profit Margin (%) 2.0 3.9 1.3 0.7 1.1 0.7
ROAE (%) 2.1 4.1 1.1 0.4 0.6 0.4
ROA (%) 0.7 1.3 0.4 0.1 0.2 0.1
ROCE (%) 1.4 2.1 0.8 2.6 1.9 1.8
Div Payout Ratio (%) 125.7 9.6 52.5 0.0 20.0 10.0
Net Interest Cover (x) 3.3 3.8 2.7 1.4 1.0 1.0

Source: Company, DBS Vickers

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 Company Focus
Medco Energi

Balance Sheet (US$ m) Asset Breakdown

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
Debtors -
Net Fixed
4.5%
Assets -
Net Fixed Assets 1,110 1,175 1,396 1,525 1,689 1,764 85.8%

Invts in Associates & JVs 0 0 0 0 0 0 Assocs'/JVs -

0.0%
Other LT Assets 402 535 556 556 556 556
Cash & ST Invts 837 523 475 411 517 683
Inventory -
Inventory 37 37 39 31 32 33 1.7% Bank, Cash
and Liquid
Debtors 147 144 102 80 78 80 Assets -
8.0%
Other Current Assets 124 118 135 135 135 135
Total Assets 2,656 2,532 2,702 2,738 3,006 3,251

ST Debt 163 142 184 184 230 344

Creditor 95 95 92 72 75 78
Other Current Liab 174 174 192 170 172 170
LT Debt 1,187 759 922 973 1,123 1,200
Other LT Liabilities 193 466 392 392 392 392
Shareholders Equity 835 885 911 936 1,005 1,056
Minority Interests 8 12 10 10 10 10
Total Cap. & Liab. 2,656 2,532 2,702 2,738 3,006 3,251
MEDC will rely on third party
Non-Cash Wkg. Capital 39 30 (8) 3 (1) 0 financing given tight internal
cash inflows amid low crude oil
Net Cash/(Debt) (514) (378) (631) (745) (835) (861)
price and marginal oil and gas
Debtors Turn (avg days) 70.2 59.9 59.6 56.1 49.9 48.8 volume expansion
Creditors Turn (avg days) 91.7 82.2 86.6 108.0 96.4 99.3
Inventory Turn (avg days) 35.3 31.9 35.5 46.2 41.2 42.5
Asset Turnover (x) 0.3 0.3 0.3 0.2 0.2 0.2
Current Ratio (x) 2.6 2.0 1.6 1.5 1.6 1.6
Quick Ratio (x) 2.3 1.6 1.2 1.2 1.3 1.3
Net Debt/Equity (X) 0.6 0.4 0.7 0.8 0.8 0.8
Net Debt/Equity ex MI (X) 0.6 0.4 0.7 0.8 0.8 0.8
Capex to Debt (%) 16.3 18.4 27.8 19.9 20.3 13.0

Source: Company, DBS Vickers

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 Company Focus
Medco Energi

Cash Flow Statement (US$ m) Capital Expenditure

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F US$
350.0

Pre-Tax Profit 181 192 111 6 10 6 300.0

250.0
Dep. & Amort. 98 100 87 100 111 126
200.0
Tax Paid (156) (154) (98) (2) (3) (2) 150.0
Assoc. & JV Inc/(loss) (1) (9) (7) 0 0 0 100.0

Chg in Wkg.Cap. (30) 63 29 (11) 4 (1) 50.0

Other Operating CF 119 71 41 0 0 0 0.0

2013A 2014A 2015F 2016F 2017F
Net Operating CF 209 264 163 93 122 129 Capital Expenditure (-)

Capital Exp.(net) (220) (166) (308) (230) (275) (201)

Other Invts.(net) (105) (65) (27) 0 0 0
Invts in Assoc. & JV 0 0 0 0 0 0
Div from Assoc & JV 0 0 0 0 0 0
Other Investing CF (68) (59) 21 0 0 0
Net Investing CF (393) (290) (314) (230) (275) (201) Lower than
Div Paid (23) (3) (5) 0 (1) 0 managements
Chg in Gross Debt 51 (449) 205 51 196 192
Capital Issues (13) 41 20 22 64 47
Other Financing CF (26) 186 (127) 0 0 0
Net Financing CF (10) (226) 94 72 259 239
Currency Adjustments 13 (8) (1) 0 0 0
Chg in Cash (180) (260) (57) (64) 106 166
Opg CFPS (US cts.) 7.2 6.0 4.0 3.1 3.5 3.9
Free CFPS (US cts.) (0.3) 2.9 (4.3) (4.1) (4.6) (2.2)

Source: Company, DBS Vickers

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 Company Focus
Medco Energi

Quarterly / Interim Income Statement (US$ m) Margins Trend

40%
FY Dec 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015
30%

Revenue 171 192 199 128 146 144 20%

10%
Cost of Goods Sold (118) (145) (127) (78) (101) (80)
0%
Gross Profit 53 47 72 50 45 64 -10%

Other Oper. (Exp)/Inc (15) (22) (27) (32) (16) (44) -20%

Operating Profit 38 25 45 18 29 20 -30%

3 3 3 4 4 4 4 5 5 5
1 1 1 1 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0
Other Non Opg (Exp)/Inc 13 6 (20) 0 0 (19)
2 2 2 2 2 2 2 2 2 2
Q Q Q Q Q Q Q Q Q Q
2 3 4 1 2 3 4 1 2 3

Associates & JV Inc 5 2 0 2 2 3 Operating Margin % Net Income Margin %

Net Interest (Exp)/Inc (18) (10) (19) (16) (19) (15)

Exceptional Gain/(Loss) 0 0 0 0 0 0
Pre-tax Profit 38 23 6 4 12 (12)
Tax (32) (23) (6) (5) (4) (15)
Minority Interest (1) (1) 0 (1) (1) (2) One-off item on ethanol
Net Profit 6 1 1 (1) (16) (27) assets divestment
Net profit bef Except. 6 1 1 (1) (16) (27)
EBITDA 56 33 26 20 30 3

Growth
Revenue Gth (%) (9.8) 12.1 3.8 (35.8) 14.4 (1.2)
Core operating profitability
EBITDA Gth (%) (2.6) (40.8) (22.4) (22.8) 53.2 (90.1) relatively stable quarter on
Opg Profit Gth (%) (34.2) (34.4) 81.8 (60.8) 62.9 (30.6) quarter
Net Profit Gth (%) 94.7 (86.9) (20.1) nm (998.9) (68.2)
Margins
Gross Margins (%) 31.2 24.5 36.3 39.0 30.8 44.4
Opg Profit Margins (%) 22.1 12.9 22.6 13.8 19.7 13.8
Net Profit Margins (%) 3.4 0.4 0.3 (1.1) (11.0) (18.7)

Source: Company, DBS Vickers

Page 43
 Company Focus
Medco Energi

Valuation

We initiate MEDC with Hold rating and DCF-based target MEDC will generate positive EBITDA for next three years.
price of Rp820, which implies 6.9x FY16F EV/EBITDA: MEDC also has ample exploration stage oil and gas reserves
for future development.
Forecast FY15-24 forms the first stage of our DCF
valuation. Our production volume and ASP assumption MEDC five years EV/EBITDA
result in 3% EBITDA growth for FY16-25F. Our long (x)
term crude oil benchmark price is US$70 per ton
7.0
For the second stage of the DCF analysis, we employ
6.0
exit multiple approach instead of terminal growth rate +2 stdev
on mining companys finite life. MEDC has remaining 5.0 +1 stdev
17 reserves life in FY25. We multiply our FCFF at the 4.0 Average
terminal year by these additional years to generate our
3.0 -1 stdev
terminal value.
2.0
Assumptions : WACC 7.6%; cost of equity 14.0%; -2 stdev
(risk free rate of 8.0%, risk premium of 7.0% and beta 1.0
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
0.9x) and cost of debt of 5.0% (after-tax)
Source: DBS Vickers, Company
Our target price implies 6.9x FY16F EV/EBITDA, which is
slightly above our domestic peers (including OSV
companies) but still below regional listed oil and gas
companies . Based on MEDCs outlook, we think the
valuation is fair, given its low cost structure. In addition,

DCF Valuation
US$mn FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F

EBITDA 187 207 236 241 247 254 261 269 277 286
(-) Depreciation (111) (126) (135) (141) (146) (152) (158) (164) (170) (177)
EBIT 76 81 101 101 101 102 103 104 107 110
Tax rate 28% (3) (2) (5) (4) (4) (4) (5) (5) (6) (7)
NOPLAT 73 79 96 97 97 98 98 99 101 102

(+) Depreciation 111 126 135 141 146 152 158 164 170 177
(-) Capex (275) (201) (128) (133) (138) (144) (149) (147) (153) (149)
(+/-) Changes in WC 4 (1) (1) (2) (1) (1) (1) (0) (0) (0)

(+/-) Other adjustment - - - - - - - - - -

Free Cash Flow for Firm (87) 2 102 103 105 105 106 116 118 130

FCFF PV -70 1 61 57 54 51 48 116 118 130

NPV 472
Terminal value 826
Equity 1,299
Net debt (1,104)

Shares out. (mn shares) 3,332

Value per share (Rp/share) 817

Source : DBSVickers

Page 44
 Indonesia Company Focus
Elnusa
Bloomberg: ELSA IJ Equity | Reuters: ELSA.JK Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 Dec 2015

FULLY VALUED Rp245 JCI : 4,374.2 Peaked performance

(Initiating Coverage)
Price Target : 12-Month Rp 205 Negatively impacted by low crude oil price
Reason for Report : Initiate coverage
Potential Catalyst: Crude oil price outlook
Risks on both existing and potential projects
Further de-rating potential
Analyst
William Simadiputra +62 2130034939 Fully Valued and TP of Rp205
william.simadiputra@id.dbsvickers.com

Growth peaked in FY14, future outlook uncertain

Price Relative on low crude oil price. We think ELSA's revenue and
Rp Relative Index
earnings have peaked this year and will drop several
years ahead and begin to become flattish in FY18. Low
258
747.6

647.6 208
crude oil price halted ELSA's upstream services segment
547.6

447.6 158 as O&G contactors halted exploration investments and

347.6
108
lifting activities, which is negatively impacting ELSA's
247.6
earnings growth on the risk of existing contract working
value re-negotiations and lack of new contract roll-outs.
147.6 58
Dec-11 Jan-13 Jan-14 Jan-15

Elnusa (LHS) Relative JCI INDEX (RHS) This will potentially hurt ELSA's investments in
equipment and technology on lower asset utilization,
Forecasts and Valuation
and unfavorable working fee.
FY Dec (Rp bn) 2014A 2015F 2016F 2017F

Turnover 4,221 3,771 3,067 2,865 Low crude oil price also hindered turnaround
EBITDA 665 486 497 468 effort. ELSA's turnaround efforts since 2010 have
Pre-tax Profit 560 441 272 233
Net Profit 412 308 189 163
resulted in profitability expansion and share price
Net Pft (Pre Ex.) 412 308 189 163 appreciation. However, we expect the turnaround effort
EPS (Rp) 56.5 42.2 25.9 22.3 to be more challenging at the current crude oil price
EPS Pre Ex. (Rp) 56.5 42.2 25.9 22.3 range. ELSA's turnaround program has not been
EPS Gth (%) 73 (25) (38) (14)
EPS Gth Pre Ex (%) 73 (25) (38) (14) completed yet as profitability on reach half of its
Diluted EPS (Rp) 56.5 42.2 25.9 22.3 potential, in our view.
Net DPS (Rp) 16.3 12.2 7.5 6.4
BV Per Share (Rp) 349.6 379.6 398.0 413.9
PE (X) 4.3 5.8 9.4 11.0
Initiate with Fully Valued call and TP of Rp205.
PE Pre Ex. (X) 4.3 5.8 9.4 11.0 Our DCF-based TP implies FY16 PE of 8.0x. We believe
P/Cash Flow (X) 4.3 2.8 3.8 8.4 ELSA should de-rate amid earnings uncertainties, mainly
EV/EBITDA (X) 1.8 1.5 1.5 1.7 on services contract renewals and slow new contract
Net Div Yield (%) 6.7 5.0 3.1 2.6
P/Book Value (X) 0.7 0.6 0.6 0.6 roll-outs.
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 17.2 11.6 6.7 5.5
At A Glance
Consensus EPS (Rp): - - - Issued Capital (m shrs) 7,299
Other Broker Recs: B: 1 S: 1 H: 2 Mkt. Cap (Rpm/US$m) 1,788,133 / 127
Major Shareholders
ICB Industry : Oil & Gas Pertamina Persero PT (%) 41.1
ICB Sector: Mining Dapen Pertamina (%) 17.8
Principal Business: Integrated oil services company, offers services
Free Float (%) 41.1
that include geophysical data, drilling and oil field services
Avg. Daily Vol.(000) 31,682

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P.

ed: TH / sa: MA
 Company Focus
Elnusa

Investment thesis

ELSA's business models consist of integrated upstream and ELSA 's three years PE Band
downstream oil & gas service companies. In our analysis, we (x)
divide the business segments into three as per new 21.0
Turnaround
+2 stdev
management based on the services and product line period
approach into upstream oil & gas services, downstream oil & before crude
14.0 oil price +1 stdev
gas services and upstream supporting business. crash
Average
ELSA per segment revenue breakdown
7.0
-1 stdev

-2 stdev
0.0
DownstreamOiland Jan-12 Jan-13 Jan-14 Jan-15
GasServices
Revenue Source: DBS Vickers, Company
41.6%
IntegratedUpstream
OilandGasServices However, ELSA's current EBITDA margin is still lower than
52.7%
other oil & gas services companies like Apexindo's (APEX IJ,
Not rated) 45%. ELSA itself could historically achieve EBITDA
margin of 34% in 2010. This means there is scope for
Upstreamoilandgas turnaround to achieve its historical high EBITDA margin and a
supportservices
5.7% sign that the turnaround story is not finished yet.
Source: DBS Vickers, Company
We see slow reform progress and weak crude oil prices giving
ELSA's turnaround story from 2011-2014 have resulted in
the industry another set of challenges, resulting in slower
better top-line growth and profitability. The key turnaround
exploration investments and upstream contractors' activities.
stories is on ELSA's radical changes to its governance and
we see this is raise challenges to the oil and services
internal control which have resulted in better expense
companies, given the slowing incoming new contracts and
control. ELSA's EBITDA margin expanded from a single digit
re-pricing risk from existing contracts in hand.
in the first semester of 2011 to double digits; 15% on
average starting second semester of 2013 (see chart below).
Moreover, our forecast relies on existing project renewals (flat
numbers of contracts under progress in our forecast). Our
q-o-q EBITDA margin trend
assumption is based on ELSA's long-standing relationships
1,400 25
with its primary clients such as Pertamina E & P and Medco
1,200 20
Energy, which have a solid cost structure and balance sheet
1,000 15 and hence, we believe they will maintain production and
800 10 exploration expenditure.
600 5
Upstream oil & gas services
400 0
We estimate revenue to drop by 60% FY15-17 CAGR, mainly
200 (5)
driven by negative growth on Seismic data acquisition and
0 (10)
oilfield maintenance services. Both account for 62% of
1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

upstream oil & gas services revenue in FY14. We expect

Revenue EBITDAmargin drilling services companies to start declining next year on
Source: DBS Vickers, Company further contractors' production cut. We expect the drilling
services segment to drop by 27% FY15-17 CAGR.
The turnaround story result share price appreciation and
valuation re-rating in the last two years and reached its peak
in 3Q14 with PE of 21.0x. ELSA stock price appreciation also
triggered by the oil & gas sector reform in Indonesia in
Jokowi's presidential period, on the hope that it will trigger
oil & gas sector's investment which will benefit ELSA
moreover, after its profitability turnaround.

Page 46
 Company Focus
Elnusa

ELSA per segment revenue breakdown (Rpbn) Oilfield maintenance services (Rpbn)
1200 250
221
980 208 208
1000 953 964
867 867 200
177 173 173
162
800 736 717
630 150
604 122 122
600 560 118 115 115 109 109 109
475 100 100
441 443
100
400 353
314 70 70
50
200 50

3 3 3 2 2
0
2013 2014 2015F 2016F 2017F 2013 2014 2015F 2016F 2017F
Drillingservices Seismicdata acquistion andseismic Oilfieldmaintenance
HydraulicWorkover Services SnubbingServices CoiledTubingServices Pumping Others
Source: DBS Vickers, Company
Source: DBS Vickers, Company
We assume 2D & 3D data collection on Seismic data
We assume a steady flow of drilling projects as we believe
collection and processing services will drop to 1,000sqkm in
producing oilfield will maintain its production activity in order
FY15 before falling further to 800 sqkm and 500sqkm in
to reach the breakeven point. We assume wire-line's total
FY16 and FY17 respectively. Our assumption is reflecting the
number of logging projects will remain at 20 projects and
lower survey, mainly seismic data collection activity which is
utilisation rate of 88% in FY15 before drop to 17 projects
an early stage of exploration expenditures in the new field.
and 13 projects in FY16 and FY17 respectively with lower
equipment utilization rate of 70%. Meanwhile, we assume
Seismic and data acquisition (km)
drilling rig will still utilise its two projects in FY15 before drop
4,000 3,741
to only one project in with utilization rtae of 83% and 65%
3,500
2,907
in FY15 and FY16 respectively.
3,000
2,567
2,500
1,982
Drilling service revenue (Rpbn)
2,000
600
549 549
1,500
1,000 500
1,000 800 451
500
500 400 372
347
289 289 284
300
2011 2012 2013 2014 2015F 2016F 2017F

Seismicdata acquisition 200

Source: DBS Vickers, Company 91 91

100

On oil field maintenance services, we expect overall revenue 2013 2014 2015F 2016F 2017F

trend to be lower mainly on reduced miscellaneous oilfield Wirelineloggingrevenue Drillingrigrevenue

maintenance activity. This is in line with ELSA clients' cost- Source: DBS Vickers, Company
cutting trend and we believe that miscellaneous maintenance
Downstream oil & gas services
activity will be less of a priority.
We forecast throughput transportation business to continue
to make a dominant contribution to ELSA's downstream
business. Meanwhile its retail business will continue to
contribute in a minor way to its revenue. ELSA's management
also do not have any ambitious targets to expand its retail
fuel distribution business in the short term.

Page 47
 Company Focus
Elnusa

Drilling service revenue (%) Upstream oil and gas revenue (Rpbn)
Fueldistribution Retailfuel 300
(depo) distribution
1.2% 0.2% 242
250
218 215
205
194
200

150

100

50

Throughput 2013 2014 2015F 2016F 2017F
transpotatation
98.6% Upstream oiland gassupport

Source: DBS Vickers, Company Source: DBS Vickers, Company

We assume flat growth for transportation business Earnings and profitability

throughput, to grow by 2% y-o-y to 12.1mnL in FY15 and
flat in FY16 and FY17. We believe the throughput volume will
peak in FY15, in line with upstream oil production volume
and relatively weak domestic demand on weakening
economy. Downstream business has thin profitability, and its
operating profit of around 2% is not sufficient to buffer its
weakening upstream-related business growth.
ELSA's cost structure consists of overhead, subcontracting,
labour and materials. Overhead and subcontracting cost will
enable ELSA to control its expenses and profitability in the
case of clients' contract re-pricing pressure. The competitive
advantage from ELSA on its local engineering and human
resources team which offer an advantage over expatriates
without impairing its services to clients.

Throughput volume (mn litre) ELSA cost breakdown (%)

14,000 Directlabor
12,357.1 12,604.2 10.8%
11,877.2 12,114.8
12,000
10,116.9
10,000
Directmaterial
8,000 17.3%

6,000 Overhead
48.2%
4,000

2,000

0
2013 2014 2015F 2016F 2017F
Subcontract
23.6%
VolumeThroughputTransportasi(mnL)

Source: DBS Vickers, Company Source: DBS Vickers, Company

Upstream oil & gas support
We forecast only flat growth on upstream oil & gas support
due to weak activity on upstream oil & gas services and
overall activities. The supporting business consists of
equipment fabrication and construction via its subsidiaries PT
Elnusa Fabrikasi & Konstruksi, PT Sigma Cipta Utama and PT
Patra Nusa Data.
Management also emphasises on efficiencies and focuses on
maintaining profitability and this is seen in 2H15 financial
performance. Amid contract renegotiation from its major
clients, ELSA is capable of maintaining stable profitability
amid downtrend in revenue.

Page 48
 Company Focus
Elnusa

Quarterly EBITDA margin trend (%) Revenue, EBITDA and net profit forecast (Rpbn)
1,400 25 6,000 800

700
1,200 20 5,000
600
1,000 15
4,000 500
800 10 400
3,000
600 5 300

2,000 200
400 0
100
1,000
200 (5) 0

0 (10) 0 (100)
2011 2012 2013 2014 2015F 2016F 2017F
1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15
Revenue EBITDA Netprofit
Revenue EBITDAmargin

Source: DBS Vickers, Company

Source: DBS Vickers, Company

We forecast that ELSA will maintain stable profitability in FY16- We also estimate that ELSA will scale back its capex spending
17 amid top-line downtrend as we believe management, whom amid challenging new contracts winning. Our forecast capex
has so far showed successful efficiency efforts, will continue to is lower than the management's guidance on its company's
support ELSA's EBITDA and earnings. Our earnings forecast latest presentation as we only accounted for minor capex
implies FY15-17 EBITDA margin of 15-16% ahead, a stable spending for new contracts, this is in line with our forecast
profitability level since ELSA's turnaround in 2013. assumption that ELSA will rely only on existing project
renewals instead of new contracts. Hence, ELSA can minimise
ELSA's profitability trend (%) its capex by slashing unnecessary spending on new
equipment.
20.0
18.0
17.3
16.516.2
15.7 15.8 15.5 15.816.3
15.0
14.6 Capex trend (Rpbn)
12.7
11.5 400
9.8 366
10.0 8.2 350
6.0 5.8 6.2 5.7
4.3 300
5.0 262 264
2.7
250
215 208
0.0 200
0.9
150 130
5.0 110
2011 2012 2013 2014 2015F 2016F 2017F 100

Grossmargin EBITDAmargin Netprofitmargin

50

Source: DBS Vickers, Company

2011 2012 2013 2014 2015F 2016F 2017F

We forecast that EBITDA and earnings will reach Rp586bn (- Capex

12% y-o-y) and Rp497bn (-15% y-o-y), net profit also has a Source: DBS Vickers, Company
similar trend and reached Rp307bn (-25% y-o-y) and Rp209bn
(-38% y-o-y) in FY15 and FY16 respectively. Our earnings We believe capital expenditure spending scale back, despite
forecast is around 15% below consensus forecast as we believe its sign the slowing business, it also positive for ELSA cash
the consensus has not fully accounted for the possibility of position and gearing level. Currently ELSA is in a net cash
existing contract renegotiations which will hurt ELSA's revenue position and we believe the trend will continue ahead, given
and earnings growth, despite ELSA's capability to maintain the lack of significant expansion, we believe, as ELSA will only
stable profitability ahead. budget its capital spending after it secured contracts in terms
of size and fee rate.

Page 49
 Company Focus
Elnusa
SWOT Analysis
Strengths
Integrated services. ELSA provides a wide range of services
on both oil & gas upstream and downstream. We believe this
gives ELSA the edge during the contract tender with
competitors on its 'one-stop shopping concept'
Strong balance sheet. ELSA's strong balance sheet relative
to other oil & gas service companies is another competitive
advantage as it provides better survival rate vs. leverages
Reputable client portfolio. ELSA's key clients are Pertamina
and Medco Energy, both largest national state-owned and
privately-owned oil & gas operators.
Opportunities
Overseas projects. ELSA plans to tap overseas oil & gas
projects such as India and Myanmar to provide earnings
growth driver amid slowing domestic oil & gas activity mainly
in exploration stage.
Downstream business. ELSA can focus on downstream
business if its upstream business continue to be challenging
ahead. ELSA's throughput transportation volume growth
relatively well in the last three years.
Source: DBS Vickers
Page 50
Weakness
Crude oil price-sensitive business model. ELSA's
diversified businesses are sensitive to a single key variable,
the crude oil price since it determines clients activity, which
third party outsourced to ELSA.
Expose to Indonesia's slow developing oil & gas field.
Indonesia's slow reform in oil & gas industry are negative to
oil & gas services companies on risk on slow new project
roll-outs.
Threats
New contract evaporation. Low crude oil price will hinder
new contracts as oil & gas contractors will halt their capital
expenditure mainly for the new reserves exploration activity.
Competition. ELSA has only 2% of market share.
Depressed oil & gas service companies will continue to
attract new contracts by offering attractive pricing. If the
trend goes viral, it could trigger industry price wars, which
would be negative for profitability.
New management. The management team which
previously turned around the company has been replaced.
This raises concerns on whether the new team could take
the company to the next level amid the currently
challenging situation.
 Company Focus
Elnusa

Company Background

Corporate History. ELSA was established in January 1969
as PT Electronika Nusantara, which transformed into PT.
Elnusa in 1984 and started to explore oil & gas-related
business such as oil & gas data storage and management,
oilfield services, and domestic fuel distribution through the
establishment of PT Sigma Cipta Utama, PT Elnusa Workover
Hydraulic, and PT Elnusa Petrofin. ELSA reinforced its
position in the oil & gas industry by establishing PT Elnusa
Drilling Services, engaged in integrated drilling services, and
acquired PT Purna Bina Nusa, a subsidiary engaged in drilling
services, and acquired PT Purna Bina Nusa (now PT Elnusa
Fabrikasi Konstruksi) based in Batam.
Turnaround story. ELSA's turnaround story was started
by its non-core business divestment in 2009-2010 such as
Yellow Pages and focus on its oil & gas services business. In
2011-2012, the turnaround programme included overall
performance from business aspects, operational and
corporate cultures. The corporate strengthening strategy
continue in 2014 and covers operational, organisation and
internal control function. ELSA also established PT Elnusa
Geosains Indonesia and PT Elnusa Oilfield Services as part of
the company's risk mitigation.
Three key business segments. ELSA's business is divided by
four key segments; Integrated upstream oil & gas services,
Upstream oil & gas support business and Downstream oil &
gas services as per 2014 new management policy on
business segment regrouping.
Upstream oil & gas services
Oilfield maintenance services. Most of the projects in
these segments are projects with long-term contracts in
various locations, especially in Kalimantan, Java and
Sumatera. Key revenue contributors are Hydraulic Work-
over and Coiled Tubing business. Utilisation rate on the
equipment such as Coiled Tubing and Slickline business is
crucial in maintaining revenue growth in this segment,
besides the addition of new equipment.
Drilling services. Projects in these segments are
medium-term contracts with main revenue contributor
Wire-line Logging and Drilling Services businesses.
Seismic & data acquisition. Most of the projects in this
segments are projects carried over from 2013 with short-
term contracts in various project locations mainly in
Sumatera and Java. This segment has fallen dramatically
since 2013 on the decrease in exploration expenditures and
crude oil price.
2. Downstream oil & gas services. These segments are
conducted via PT Elnusa Petrofin with the main business of
transport. The business is supported by four additional Liquid
Fuel Terminals (TBBMs) located in Sulawesi and two TBBMs in
East Nusa Tenggara in 2014.
3. Upstream oil & gas support services. The key contributor of
this segment is PT Elnusa Fabrikasi & Konstruksi on fabrication
services, followed by OCTG on threading service segment.

Sales Trend Profitability Trend

Rp m
Rp m
10.0%
4,000 512

3,500 5.0%
462
3,000 0.0% 412
2,500
2,000 -5.0% 362

1,500 312
-10.0%
1,000 262
-15.0%
500 212
0 -20.0%
162
2013A 2014A 2015F 2016F 2017F 2013A 2014A 2015F 2016F 2017F

Total Revenue Revenue Growth (%) (YoY) Operating EBIT Pre tax Profit Net Profit

Source: Company, DBS Vickers

Page 51
 Company Focus
Elnusa

Company structure

Source: DBS Vickers, Bloomberg Finance L.P.

Management Composition. Despite the board of board of director members have extensive experience in the
directors being relatively new, having just been appointed in oil & gas industry with both local and multi-national
mid-2014, as part of previous management rotation, the companies.

Key Management Team

Name Current appointment Experiences

Syamsurizal President Director Appointed as president director since May 2014.

Previously served as director and chief financial officer of PT Medco Energi
International (MEDC IJ ) and advisor of board of commissioners of MEDC.
Sabam Hutajulu Director of Finance Appointed as director of finance for the second period since May 2014.
Previously served in board of directors of Zambesi Investment Limited, Hong
Kong in 2009-2011.
Held several key positions in oil & gas companies like Petamina Energy
Services Ltd, Singapore.
Lusiaga Levi Susila Director of Operation Appointed as Director of Operation since March 2013.
Served several positions in Pertamina, such as GM JOB Pertamina-
Lekomaras (2006), Director of Operation of PT Pertamina EP and Primary
Staff of Director of Upstream Business of PT Pertamina in 2011 and PT
Pertamina EP Director of Operation (2011-2013).
Helmy Said Director of Human Resources Appointed as Director of Human Resources and General Affairs for the
second period since May 1994.
Previously he was Expert Staff at Directorate of Investment Planning & Risk
Management of PT Pertamina (2011).
Source: Company

Page 52

Competitive Strengths
Extensive service offerings. ELSA offers extensive oil &
gas services from seismic survey to drilling, which provide
contractors with one-stop shopping convenience, which we
believe provide ELSA with a better edge in contract tenders
relative to sole-service oil & gas service companies.
Strong balance sheet. ELSA is oil & gas services company
with strongest balance sheet, net cash position. This arms
ELSA with better survivability amid the challenging industry.
Reputable clients. ELSA's clients consist of Indonesia's
largest oil & gas contractors, both state-owned and privately
owned entities such as Pertamina and Medco Energi.
Exposure to top reputable contractors guarantee healthy
receivables and cash flows. Moreover, this also reflects ELSA's
execution track record in offering satisfactory services, and
competitive contract pricing. Having reputable clients also
implies that ELSA has good receivable quality.
Growth Strategies
Focus on maintaining stable profitability. ELSA focuses
on maintaining its profitability amid its top-line downtrend
prospects as seen in its 1H15 performance. ELSA will reduce
and control its overhead cost (48% of total COGS) and to
continuously employ local engineers vs. expatriates.
Company Focus
Elnusa
Prudent capital allocation. ELSA guarantees that it will
only invest in new equipment after considering the economic
feasibility of contracts that it could obtain. This is also part of
its strategy to maximise its equipment utilisation rate.
Key Risks
Softer-than-expected contract re-pricing. If the contract
renegotiation process outcome is better than our estimate,
ELSA should book better-than-expected top-line and earnings
growth outcome relative to our forecast.
Better-than-expected upstream oil & gas investment
trend and new project roll-outs. If oil & gas investments trend
mainly on exploration projects and are better than we
expected, ELSA can obtain new contracts and renew its
existing contracts with competitive fees. Hence, ELSA's top-
line and earnings growth should also be better than our
forecast.
Successful overseas diversification strategy. We assume
only modest contribution from overseas projects on execution
risk concerns. However, if ELSA successfully delivers positive
results from its overseas projects, it will enable to offset the
weak domestic oil & gas project growth.
Page 53
 Company Focus
Elnusa

Key Assumptions Sensitivity Analysis

2016
FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
Topline growth +/-
Net Profit +/- 4%
Drilling rig revenue 1%
N/A 867.0 964.0 980.3 604.1 516.7 EBITDA margin +/-
(Rpbn) Net Profit +/- 9%
1%
Seismic data collection,
2,906.6 3,741.1 1,982.0 1,000.0 800.0 500.0
2D & 3D (sqkm)
Throughput volume
N/A 10.1 11.9 12.1 12.4 12.6
(mn kL)
Our per segment
EBITDA Margin (%) 12.7 14.6 15.8 15.5 16.2 16.3 assumption is in line with
Capex (Rpbn) 0.0 0.0 0.1 0.1 0.1 0.1 Indonesia's overall oil &
gas industry activity
Segmental Breakdown
FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
Our per segment
Revenues (Rp m) assumption is in-line
Integrated Upstream Oil with Indonesia's overall
2,978 2,543 2,454 1,976 1,379 1,158 oil & gas industry
and Gas Services
activity
Upstream Oil and Gas
333 242 218 215 205 194
Support Services
Downstream Oil and
1,466 1,327 1,549 1,580 1,483 1,513
Gas Services
0 0 0 0 0 0
Others 0 0 0 0 0 0
Total 4,777 4,112 4,221 3,771 3,067 2,865
Operating profit (Rp
)
Integrated Upstream Oil
81 307 186 305 246 171
and Gas Services
Upstream Oil and Gas
(4) 112 40 13 13 12
Support Services
Downstream Oil and
14 (18) (30) 20 21 19
Gas Services
0 0 0 0 0 0
Others 0 0 0 0 0 0
Total 91 402 195 338 279 203
Downstream business has
Operating profit
thin profitability and hence,
MIntegrated
i (%) Upstream Oil
2.7 12.1 7.6 15.4 17.8 14.8 could not buffer the
and Gas Services earnings growth amid
Upstream Oil and Gas ELSA's upstream revenue
(1.1) 46.4 18.3 6.0 6.2 6.3
Support Services and earnings downtrend
Downstream Oil and
1.0 (1.3) (2.0) 1.3 1.4 1.3
Gas Services
Total 1.9 9.8 4.6 9.0 9.1 7.1

Source: Company, DBS Vickers

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 Company Focus
Elnusa

Income Statement (Rp m) Margins Trend

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F 14.0%
13.0%
Revenue 4,777 4,112 4,221 3,771 3,067 2,865 12.0%
11.0%
Cost of Goods Sold (4,226) (3,465) (3,461) (3,119) (2,561) (2,412)
10.0%
Gross Profit 551 647 760 652 506 453 9.0%

Other Opng (Exp)/Inc (239) (277) (200) (259) (217) (206) 8.0%
7.0%
Operating Profit 312 370 560 393 289 247 6.0%

Other Non Opg (Exp)/Inc 0 0 0 70 0 0 5.0%

2013A 2014A 2015F 2016F 2017F
Associates & JV Inc (24) 1 0 0 0 0 Operating Margin % Net Income Margin %

Net Interest (Exp)/Inc (77) (34) 0 (21) (17) (14)

Exceptional Gain/(Loss) 0 0 0 0 0 0
Pre-tax Profit 211 337 560 441 272 233
Tax (75) (95) (142) (134) (82) (71)
Minority Interest (8) (5) (6) 0 0 0
Preference Dividend 0 0 0 0 0 0
Net Profit 128 238 412 308 189 163
Net Profit before Except. 128 238 412 308 189 163
EBITDA 605 599 665 586 497 468
Growth
Revenue Gth (%) 1.3 (13.9) 2.7 (10.7) (18.7) (6.6)
EBITDA Gth (%) 193.4 (0.6) 24.3 (5.8) (24.2) (5.8)
Opg Profit Gth (%) 393.5 18.4 51.3 (29.8) (26.5) (14.5)
Net Profit Gth (%) nm 86.1 73.2 (25.4) (38.5) (14.1)
Margins & Ratio
Gross Margins (%) 11.5 15.7 18.0 17.3 16.5 15.8
Opg Profit Margin (%) 6.5 9.0 13.3 10.4 9.4 8.6
Net Profit Margin (%) 2.7 5.8 9.8 8.2 6.2 5.7
ROAE (%) 6.6 11.1 17.2 11.6 6.7 5.5
ROA (%) 2.9 5.5 9.6 7.1 4.3 3.8
ROCE (%) 6.7 8.5 13.2 8.6 6.2 5.2
Div Payout Ratio (%) 5.6 5.4 28.9 28.9 28.9 28.9
Net Interest Cover (x) 4.1 11.0 NM 18.3 16.8 18.0

Source: Company, DBS Vickers

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Elnusa

Balance Sheet (Rp m) Asset Breakdown

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Net Fixed
Assets -
Debtors - 37.4%
Net Fixed Assets 1,257 1,049 1,240 1,311 1,317 1,296 23.7%

Invts in Associates & JVs 0 0 0 0 0 0

Other LT Assets 727 830 769 769 769 769
Assocs'/JVs -
Cash & ST Invts 928 1,320 1,060 1,258 1,380 1,284 0.0%

Inventory 93 103 115 103 85 80

Debtors 1,119 958 930 831 676 746 Inventory - Bank, Cash
3.0% and Liquid
Other Current Assets 171 112 131 131 131 131 Assets -
35.9%
Total Assets 4,295 4,371 4,246 4,404 4,359 4,306

ST Debt 434 409 244 195 156 125

Creditor 369 306 305 275 226 132
Other Current Liab 884 845 829 897 845 834
LT Debt 531 496 249 199 159 127
Other LT Liabilities 34 30 36 36 36 36
Shareholders Equity 2,017 2,258 2,552 2,770 2,905 3,021
Minority Interests 25 27 31 31 31 31
Total Cap. & Liab. 4,295 4,371 4,246 4,404 4,359 4,306
Net cash position helps ELSA to
survive amid weak oil & gas
Non-Cash Wkg. Capital 129 21 42 (106) (179) (9)
services demand environment
Net Cash/(Debt) (37) 415 567 863 1,065 1,031
Debtors Turn (avg days) 88.4 92.2 81.6 85.3 89.7 90.6
Creditors Turn (avg days) 44.3 37.6 33.5 36.2 38.8 29.8
Inventory Turn (avg days) 9.3 10.9 11.9 13.6 14.6 13.7
Asset Turnover (x) 1.1 0.9 1.0 0.9 0.7 0.7
Current Ratio (x) 1.4 1.6 1.6 1.7 1.9 2.1
Quick Ratio (x) 1.2 1.5 1.4 1.5 1.7 1.9
Net Debt/Equity (X) 0.0 CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) 0.0 CASH CASH CASH CASH CASH
Capex to Debt (%) 14.2 2.3 60.1 66.9 68.0 79.4

Source: Company, DBS Vickers

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 Company Focus
Elnusa

Cash Flow Statement (Rp m) Capital Expenditure

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Rp
350.0

Pre-Tax Profit 211 337 560 441 272 233 300.0

250.0
Dep. & Amort. 293 229 105 193 208 221
200.0
Tax Paid (75) (95) (142) (66) (134) (82)
150.0
Assoc. & JV Inc/(loss) 24 (1) 0 0 0 0 100.0

Chg in Wkg.Cap. 265 79 (24) 80 125 (158) 50.0

Other Operating CF (180) 203 (79) 0 0 0 0.0

2013A 2014A 2015F 2016F 2017F
Net Operating CF 537 754 421 649 471 214 Capital Expenditure (-)

Capital Exp.(net) (137) (21) (296) (264) (215) (201)

Other Invts.(net) 27 46 0 0 0 0
Invts in Assoc. & JV 0 0 0 0 0 0
Div from Assoc & JV (24) 1 0 0 0 0
Other Investing CF 47 14 (58) 0 0 0
Net Investing CF (87) 41 (354) (264) (215) (201)
Div Paid (7) (13) (119) (89) (55) (47)
Chg in Gross Debt (67) (60) (412) (99) (79) (63)
Capital Issues 9 15 0 0 0 0 Modest capex budget
Other Financing CF (169) (467) 192 0 0 0 on slow new contract
additions
Net Financing CF (235) (525) (338) (187) (134) (110)
Currency Adjustments 24 122 12 0 0 0
Chg in Cash 239 391 (260) 197 123 (97)
Opg CFPS (Rp) 37.3 92.4 61.0 77.9 47.5 51.0
Free CFPS (Rp) 54.9 100.4 17.1 52.7 35.1 1.8

Source: Company, DBS Vickers

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Elnusa

Quarterly / Interim Income Statement (Rp m) Margins Trend

25%
FY Dec 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015
20%

Revenue 1,094 1,008 1,200 925 879 816

15%
Cost of Goods Sold (928) (847) (916) (767) (741) (670)
10%
Gross Profit 166 161 285 158 138 146
Other Oper. (Exp)/Inc (74) (29) (27) (66) (43) (85)
5%

Operating Profit 92 133 258 91 95 61 0%

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015
Other Non Opg (Exp)/Inc 87 0 (87) 0 0 70
Associates & JV Inc 0 0 0 0 0 0 Operating Margin % Net Income Margin %

Net Interest (Exp)/Inc (2) 4 3 (2) (2) (4)

Exceptional Gain/(Loss) 0 0 0 0 0 0
Pre-tax Profit 177 136 173 89 93 127
Tax (52) (25) (45) (23) (24) (32)
Minority Interest (1) (2) (4) (1) (2) (1) Stable profitability despite
Net Profit 124 110 124 65 68 94 downtrend in top-line growth
Net profit bef Except. 124 110 124 65 68 94
EBITDA 179 133 170 91 95 131

Growth
Revenue Gth (%) 19.2 (7.8) 19.0 (23.0) (5.0) (7.1)
EBITDA Gth (%) 131.0 (26.0) 28.6 (46.5) 4.4 37.5
Opg Profit Gth (%) 18.3 44.6 94.3 (64.6) 4.4 (35.9)
Net Profit Gth (%) 129.2 (11.4) 12.9 (47.5) 3.6 38.7
Margins
Gross Margins (%) 15.2 16.0 23.7 17.0 15.7 17.9
Opg Profit Margins (%) 8.4 13.2 21.5 9.9 10.8 7.5
Net Profit Margins (%) 11.3 10.9 10.3 7.0 7.7 11.5

Source: Company, DBS Vickers

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Elnusa

Valuation

We initiate coverage on ELSA with Fully Valued rating and
DCF-based target price of Rp205 FY16F PE of 8.0x :
Explicit forecast FY15-24E forms the first stage of our
DCF valuation. We assume ELSA's revenue and earnings
come only from existing undergoing contracts. Our
long-term crude oil benchmark price is US$70 per barrel
and we believe there will be minimum new contract
rollouts. This allows minimal capex as ELSA requires less
new equipment purchase.
For the second stage of the DCF analysis, we employ
exit terminal growth rate of 0% as we only assume the
renewal contract from existing projects during our
forecast life-time.
WACC assumption of 14.2% with cost of equity and
debt assumption of 16.0% (risk free rate of 8.0%, risk
premium of 7.0% and beta 1.1x) and 5.1% (after-tax)
respectively.
Our target price implies FY16F PE of 8.0x, lower with our oil
and gas companies multiple. We believe ELSA should de-rate
its PE multiple to single digit, and enterprise value (EV) close
to its EBITDA on the back of its uncertainties on its upstream
projects, in our view. Even we understand that current
valuation looks undemanding, ELSA will face headwinds such
as uncertainties on existing contracts renewal and new
contracts roll out amid current low crude oil price and slow
Indonesia oil and gas investment climate reform.
We believe PE multiple is fair for ELSA multiple for our sanity
check given ELSA's steadier business model; contract-based
with steady recurring cash flows, moreover, ELSA will only
allocate capex when it can fully secured a new contract only
hence, prevent ELSA from balance sheet over-leveraged.
ELSA also less exposed to the one-time non-operational
items such as operational discontinuation and assets
impairment as seen in upstream oil and gas contractors.

DCF Valuation
US$mn FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F
EBITDA 497 468 466 467 471 487 456 468 487 507
(-) Depreciation (208) (221) (233) (246) (267) (288) (303) (325) (346) (367)
EBIT 289 247 233 221 203 199 153 143 141 140
Tax rate 28% (134) (82) (71) (67) (64) (59) (59) (45) (42) (42)
NOPLAT 155 165 162 154 139 139 94 98 99 98

(+) Depreciation 208 221 233 246 267 288 303 325 346 367
(-) Capex (215) (201) (224) (358) (346) (266) (363) (356) (357) (414)
(+/-) Changes in WC 125 (158) 15 12 22 (16) (66) (23) (3) (98)

(+/-) Other adjustment - - - - - - - - - -

Free Cash Flow for Firm 273 27 186 54 82 145 (31) 44 85 (47)

FCFF PV 336 239 21 125 32 42 65 -12 15 26

NPV 540
Terminal value (87)
Equity 453
Net debt 1,065

Shares out. (mn shares) 7,299

Value per share (Rp/share) 207

Source : DBSVickers

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 Industry Focus
Oil & Gas

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
* Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by PT. DBS Vickers Securities Indonesia ("DBSVI"). report is solely intended for the clients of DBS Bank Ltd and DBS
Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the DBS Vickers
Group) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to
DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents
(collectively, the DBS Group)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions
expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this
document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.
This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees,
who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect
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herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and
there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates
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estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary
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described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the
aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings
or risk assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
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to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking
transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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15 December 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests
in the securities recommended in this report (interest includes direct or indirect ownership of securities).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. PT. DBS Vickers Securities Indonesia ("DBSVI") does not have a proprietary position in the securities recommended in this report
as of 15 December 2015.
2. Compensation for investment banking services:
DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12
months for investment banking services from Keppel Corporation as of 30 November 2015.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of

Page 
Industry Focus
Oil & Gas

securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US
persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a
transaction in any security discussed in this document should contact DBSVUSA exclusively.

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Wong Ming Tek, Executive Director, ADBSR

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