PGAS’ 2011 annual report highlights its strategy to focus on acquiring E&P assets, gas trading, city gas distribution and power plants. Also, the company is looking at leveraging its unproductive land bank in Jakarta. We see these initiatives as alternative but expensive ways to secure gas supplies and will await more clarity on the strategy for core pipeline business expansion. Our view on the strategy is as follows:
- E&P assets: PGAS has formed a subsidiary, SiNERGI, which will invest in gas fields that are already productive or fields that have obtained Plan of Development (POD) approval from BP Migas and have small to medium remaining reserves. This we believe is an expensive way to access gas supplies and brings along with it the risk of E&P and could possibly reduce PGAS’ utility valuations. PGAS is currently looking at 3-4 blocks in Indonesia & overseas.
- Increased Distribution coverage: PGN will develop the inland CNG and mini LNG businesses in areas beyond the reach of pipelines. Distribution will be expanded into new areas such as Bandung, Lampung and Balikpapan.
- Power Plants: PGN will enter the electricity supply business as part of its strategy to secure gas supplies and increase the value-added in natural gas utilization. The power generation business will be developed by GoENERGI.
- Land Development: Considering 7-9% yields on commercial property, we like PGAS’ asset monetization strategy to lease out unutilized space. Other Highlights: PGAS increased its pipeline network 5,962kms, marginally higher than 2010. With PGAS turning becoming debt free (net cash) in 2011, PGAS diversified its cash investments into corporate bonds of Antam, PERTAMINA and Indonesia Exim bank.
