Indonesia's Medco Energi eyes its home market for M&A

Indonesia's Medco Energi eyes its home market for M&A

Hilmi Panigoro, president of Medco Energi Internasional, speaks during a
Jan. 5 interview at the company's headquarters in Jakarta. (Photo by Wataru
Suzuki)
Despite its small size, Medco has inked deals worth some $3 billion in
Indonesia over the past six months, snapping up a major copper mine and an
offshore oil block from U.S. companies, as well as winning a bid to develop
a water treatment project. All the acquired assets are in Indonesia.

Medco's shopping spree kicked off in June 2016, when it announced a $2.6
billion bid to buy the Batu Hijau copper and gold mine on the eastern island
of Sumbawa from Newmont Mining and its partners. Three months later, Medco
said it would acquire ConocoPhillips' 40% stake in South Natuna Sea Block B
for about $240 million, marking an ambitious foray into offshore exploration
and production. In early January, Medco won a tender for a 2.1 trillion
rupiah ($157 million) water treatment project in East Java.

The company is still hungry. "We are in discussions," Medco President Hilmi
Panigoro told the Nikkei Asian Review when asked whether the company is
pursuing the 25% stake that Chevron holds in the South Natuna Sea block. As
for the remaining 35%, held by Japan's Inpex, "if they decide to sell, we
are more than happy to talk to them," he said with a smile.

Medco's share price tumbled to an 18-year low of 670 rupiah in February
2016. Instead of retreating, Panigoro took a counterintuitive approach to
expand amid turbulence in the commodities market. The company's shares have
bounced back, ending at 1,455 rupiah on Jan. 13.

Dressed in a short-sleeved traditional batik shirt, Panigoro, 61, looked
relaxed during the interview, on the top floor of The Energy Building, the
company's headquarters in Jakarta. He had just returned from a three-day
vacation on a remote plantation in West Java.

But his calm demeanor belies his big ambitions during his two decades at the
company. Panigoro's older brother Arifin founded the business in 1980 as a
drilling contractor for a foreign-owned company, Stanvac Indonesia. Medco
eventually bought the company in 1995 and a year later discovered a giant
oil field in South Sumatra that remains one of Medco's most important
revenue generators.

GLOBAL AMBITIONS

As business boomed, Panigoro, who had worked at another oil company, joined
his brother in 1997. "We basically beca-me a real player," he said, "and at
that time, our ambitions became to go global."

It turned out to be a bad time for expansion. The 1997 Asian financial
crisis struck, and most banks refused to give loans. It took several years
for Medco to restart its global push. In 2004, it acquired an
Australia-listed oil company, Novus Petroleum, and later entered the Middle
East. But after investing hundreds of millions of dollars in oil businesses
in Libya and Yemen, Medco's ambitions were once again jeopardized by the
violent conflicts associated with the Arab Spring.

"Can you imagine, a company of our size, had more than $300 million stuck
[overseas]?" Panigoro said. "That hurt us." Meanwhile, major projects at
home, like the Donggi Senoro liquefied natural gas project in Sulawesi, were
facing delays.

Medco's current expansion was triggered by the latest crisis, a sharp
decline in crude oil prices that started in the second half of 2014. In
2015, Medco's earnings were hit hard as revenue fell 16% to $628 million,
while the company's bottom line swung from a $4.7 million net profit to a
$182 million net loss, due to a $230 million impairment charge. Medco
returned to a $22 million profit for the first nine months of 2016 as oil
prices bottomed out.

Panigoro considered unloading some of the group's assets to survive. But the
ambitious man instead decided a better approach was "to find a more
productive asset to cover [our] debt." One of the assets that stood out was
Batu Hijau, a lucrative copper and gold mine but one in which the leading
shareholder, Newmont Mining, had been in a spat with the Indonesian
government over the construction of a smelter. A recently updated regulation
also stated that foreign miners eventually need to divest 51% of their stake
in order to continue exports.

GOVERNMENT SUPPORT

The government, which had appeared increasingly keen to nationalize its
natural resources, also lent a hand. The newly established company buying
mine operator Newmont Nusa Tenggara was a joint venture with a former
executive at state-owned securities company Danareksa Securities. Three
state-owned banks, Bank Mandiri, Bank Rakyat Indonesia and Bank Negara
Indonesia, provided loans totaling $750 million, which Panigoro said was "a
better deal" than a separate offer by a consortium of private lenders.

In late 2015, Arifin, whose official title at the company is adviser,
outlined to Rizal Ramli, who was then in charge of the energy ministry,
Medco's plans to bid for the mine. After one meeting, Ramli reportedly said
he supported the deal because it would prove that an Indonesian company had
the capability to take over a large asset.

"I have to admit, I don't [think] we could have done this without the full
support of the government," Panigoro said, "although looking at the
fundamentals, it's fully justified ... [and] the loans will be repaid in 18
months."

While Medco officials deny any direct ties with the government, Arifin was
once a senior member of the Indonesian Democratic Party of Struggle, the
ruling party that backed President Joko Widodo in the 2014 election. The
company's board of commissioners and advisers is packed with former
top-level government officials, including Chairman Muhammad Lutfi, a former
trade minister. One analyst at a local brokerage says, "Hilmi runs the daily
operations, while Arifin does all the lobbying to the government."

Panigoro said Medco was also given a guarantee that the government would
ease the ban on exports of copper concentrate that Batu Hijau produced, a
critical measure if the company was to generate cash and repay its loans. On
Jan. 12, the government announced a sweeping set of new mining rules that
allowed copper concentrate exports for another five years, under certain
conditions.

Other projects that the company has been involved in include the Donggi
Senoro project, which made its first shipment in 2015 and in which Medco has
a stake in both upstream and downstream operations. The 330-megawatt Sarulla
geothermal project in North Sumatra, jointly developed by a consortium of
Japanese companies and Medco's power unit, recently finished the first phase
of construction. In 2015, Medco partnered with the Philippines' Aboitiz
Power to explore a geothermal plant in Indonesia. "We are creating three
pillars -- power, oil and gas, and mining. We want to grow these pillars in
the future," said Panigoro.

Medco produced 55,620 barrels of oil equivalent a day in 2015, less than a
tenth of state-owned oil and gas company Pertamina's output. Panigoro argued
that a strong, second local player is needed, citing the example of Pemex,
the state-controlled oil company of Mexico. "Every country has so-called
resource nationalism ... but look what happened in the last two years when
Pemex became too big to operate the whole asset in the country," he said,
referring to billions of dollars of losses the company suffered from the
decline in oil prices. "That's why I suggested to the government that it's
OK for Pertamina to control as much as possible, within its ability to
control operations."

Medco's market capitalization stands at around $400 million, much smaller
than its regional peers. But the company has ambitions to become a major new
domestic player in the energy and resource sectors by buying foreign assets
during cyclical downturns. Many of the new projects, however, "are still
'hidden assets.' It will take some time before they give meaningful impact
to Medco's share price," said William Simadiputra, an analyst at DBS Vickers
Securities.

Medco's interest-bearing debt stood at $1.7 billion as of September 2016, a
57% rise from three years ago, according to QUICK-FactSet data -- a much
faster growth rate than its assets, which rose 17% over the same period. The
company's debt burden is set to increase further due to the string of
acquisitions. It has also promised the government it will build a smelter
near the Batu Hijau mine that could cost hundreds of millions of dollars
more.

Panigoro acknowledged that the smelter may dent profits, calling it "a
necessary evil," and said he is considering an IPO for the mining unit to
fund its construction. Cost-cutting measures have returned Medco to
profitability for the first nine months of 2016. Investors will be watching
to see whether government policies will be an asset or a liability when it
comes to the company's bottom line.

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Link to Original Article:
http://asia.nikkei.com/magazine/20170119/Business/Medco-Energi-returns-home-
in-3-bn-Indonesian-acquisition-spree

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com