Medco Energi International (MEDC IJ)

A potentially more compelling growth story in FY24

We reiterate our Buy rating on MEDC with a TP of IDR1,900 as we see upside in earnings and reserve in 2024F onwards from the potentially accretive prospective Middle East asset acquisition and the potential release of Tanzania 2P Reserves.

Expect the potential Middle East acquisition to be completed at end of 2023. Medco entered into an agreement to acquire a 20% non-operating stake in a Middle East O&G asset in Aug23, with management expecting the deal to be closed by end of FY23. According to Fitch report, the potential new block may add production rate of 13 mboped and 2P reserves of 56 mmboe (net MEDC’s ownership). Our conservative estimation sees the acquisition may be valued at USD560mn (based on valuation/ reserve of USD10/boe vs. Ophir and Corridor acquisition of around USD8/boe), which we assumed to be fully funded through bank loans at CoF of 7%. Assuming the deal will be finalized at end of 2023, we think this block may begin to contribute to MEDC’s financials as soon as 1Q24.

A potentially accretive acquisition for MEDC’s FY24 earnings. Assuming an additional 13 mbopd from the potential Middle East block acquisition, we estimate 8.5% uplift in MEDC’s 2024F total production volume to 166 mboepd. We also see potential for the block to have low operating costs given its onshore location and thus, expect its lifting costs to be around USD10/boe. Assuming net split of 60% for MEDC from this block, we expect that the prospective acquisition to be potentially accretive and estimate a 19% boost in MEDC’s 2024F net profit (to USD362mn post-acquisition). 

Another potential ‘gold treasure’ from Tanzania block. MEDC acquired a block in Tanzania as part of Ophir’s asset takeover in 2019. The Tanzania block is currently under development with JV partners in Block 1 and 4 comprising of Medco (20%), Shell (operator, 60%), and Pavilion Energy (20%). We see a huge upside for MEDC’s reserve from the block’s potential reserves of 16 TCF, hence translating to 3.2 TCF or 569mmboe net ownership for MEDC. While we are aware that the conversion of potential reserves to actual 2P reserves may involve a huge discount, we believe this block will nonetheless offer a significant boost to MEDC’s current 2P reserves (of 491mmboe). We expect the 2P reserves of the Tanzania block to be released in 4Q24.

Maintain Buy rating. We await further details on the asset acquisitions before we incorporate the impact on our 2024F earnings forecasts. While MEDC’s share price has been dragged by oil price correction, we believe there is still plenty of upside in earnings and reserve in 2024 onwards. Thus, we reiterate our Buy rating on MEDC with an unchanged SOTP-based TP of IDR1,900. Key risks include delays in the finalization of the deal weaker oil price.

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