Energi Mega Persada

In recent days, one of Bakrie Group stocks, Energi Mega Persada (ENRG), again became popular amongst the traders after rose from Rp70 to 100 per share, gained about 35% in less than a month. I personally do not care even if this stock rose to 1,000, because since 2009 I have decided to blacklist the entire Bakrie stocks, including ENRG, and until now the decision has not been changed. However, as ENRG recorded a profit of U.S. $ 214 million in the third quarter 2013, an increase of approximately 10-fold over the same period in the previous year, then you may assume that this stock is have an attractive fundamental because on the other side, its PBV was only 0.4 times aka low enogh. But is it so?

Compared to other companies in the same sector in Indonesia, ENRG is a new company established in 2001, ie when the Bakrie Family decided to get into the energy sector, in this case oil and gas (other than coal through the Bumi Resources/BUMI). Armed with the ability of the family in acquiring assets, in 2003 ENRG acquired its first asset, RHI Corporation, which indirectly owns 34.5% stake in Strait of Malacca Block, which then increased to 60.5%. In 2004, ENRG again add an oil block to its portfolio, this time Lapindo Brantas Inc., which holds 50% stake in Brantas Block in Sidoarjo, East Java. Also in 2004, ENRG held an IPO so then the company listed on the Stock Exchange.

In subsequent years, the acquisitions continue, as well as removing some of the assets held. As a result, by the end of 2013, ENRG has nine oil blocks spread from Aceh to East Kalimantan, not including the other two oil blocks that are still in the exploratory stage. Some of the oil blocks are managed by the company itself (ENRG became the operator), but some others are managed by Pertamina, and this suggests a strong relationship between ENRG and the state oil company.

As we have discussed in an article titled Heart is Only for Lovers, Bro!, we know that the Bakrie Group is a specialist in asset acquisitions, where they seemed to easily acquiring oil blocks which then placed under ENRG (including acquiring oil palm plantations for UNSP, or acquiring coal mines fro BUMI, and so on). But well, it's the only ability of theirs: Taking over the assets. Then what would they do with the asset? We’ll take care of it later!

So Bakrie Group as the owner of ENRG is more actively on the business of buying and selling oil assets, where they’re acquiring oil blocks to be sold to other companies at higher price (similar to stock trading huh?). Okay, they are of course also drill for oil, then sell the output, and then get money from it. And in 2012, after some acquisitions in years before, the oil revenues eventually jumped from U.S. $ 138 million in 2010 to U.S. $ 655 million in 2012. Later in 2013, or at least until the third quarter, the growth continues where the Company’s revenue grew into U.S. $ 577 million, against U.S. $ 435 million in the same period of previous year, as a result of rising oil production.

But what about the net profit? Well, I do not think that it is difficult for anyone to immediately found the fact that the company’s net income of U.S. $ 214 million (until third quarter 2013), is due to the sale of one of the company's oil assets, ie Masela Block, to two foreign oil companies namely Shell and Inpex Corp. The value of the sale was U.S. $ 313 million, which after some expenses including tax, the net proceed is U.S. $ 164 million. If there wasn’t such transaction, the net profit of ENRG would only about U.S. $ 50 million, and it once again shows that the oil business in Indonesia is only offering a small profit margin, usually because of the high cost of oil exploration plus, in case of ENRG, because of the cost of interests of bank loans or bonds, given ENRG acquires most of its assets by way of debt. At this time, the amount of total liabilities of ENRG is U.S. $ 1.3 billion, or still larger than the total equity of U.S. $ 929 million.

Anyway, I found an interesting fact when trying to estimate how much profit would be gained by the company the future, if ENRG is able to maximize its remaining oil reserves in its oil blocks. Here is data of volume of oil production, plus the rest of proven oil reserves in each block of the company, as of third quarter 2013:

Block	2013 Production	Proven Reserve
Kangean	5,891	60,081
Offshore North West Java	6,905	31,880
Bentu	1,151	26,420
Malacca Strait	1,034	9,461
Tonga	67	1,501
Sungai Gelam	207	821
Gebang	22	205
Korinci Baru	1	155
Semberah	286	82
Total	15,564	130,605

Note:

1. Figures above are in thousands of barrels of oil equivalent.
2. The figures has been adjusted by the percentage of the company’s ownership on each block. For example, the volume of oil production from Kangean Block was, in overall, 11,781 thousand barrels. But because ENRG only holds 50% ownership of Kangean, then the production share for ENRG is 50% of the 11,781 thousand barrels, aka 5,891 thousand barrels.
3. 2013 Production is a production data for the period of First Nine Months of 2013.
4. Provern Reserve is the data of proven oil reserves as at 30 September 2013.

Okay, pay attention. Based on the above data, we know that ENRG had oil production (and gas, and others) of a total of 15.6 million barrels. And how much the revenue received by the company from that production? Well, just say it U.S. $ 577 million because that is the revenue of the company until the third quarter of 2013. You might noted that this number of revenue may not reflects the oil production volume because there may be some oil products that has not been sold, or an income that has not yet booked.

However, for reasons of simplicity (and conservative), let's assume that the revenue is in line with the oil production of the company. Thus, since the remaining portion of reserves in the oil blocks owned by the company was 130.6 million barrels, then how much the potential revenue for the company in the future? Well, just calculate it, ie U.S. $ 577 million divided by 15.6 million barrels, and then multiplied by 130.6 million barrels. And the result was U.S. $ 4.8 billion. We take the net profit margin of 10% (already including net of expenses of loan interest), then the profit would be U.S. $ 483 million, or around Rp5.5 trillion based on the current exchange rate of Rp11,500 per US Dollar.

And what is the current price of ENRG? Well, only Rp4.2 trillion in the stock price of Rp95 per share. Low enough, is not it? Remember that the calculation of the total net income as we’ve discussed above is only calculating the proven oil reserves, but not yet calculate the potential oil reserves to be found later, plus the possibility of rising oil prices in the future. For an illustration, the oldest oil blocks owned by the company, ​​Malacca Strait, it was only a small oil blocks when it explored in 1970, with reserves of several hundred thousand barrels only, and at the time the oil price was also only around U.S. $ 15 per barrel. But after a series of exploration and production for decades, the block has produced oil of a total of 234 million barrels, but there was still 16 million barrels remaining! So in this case I could say that although some oil blocks belonging to ENRG like Gebang, Korinci Baru, and Semberah only have small oil reserves, but the exploration has not been done yet. And also do not forget that the company still have two more oil blocks which are still in the exploratory stage (so the amount of oil reserves is not yet discovered).

But When We Talk About Bakrie, That Means..

But frankly, the point above still does not make the stock of ENRG become worth to buy, especially for long-term investment, and there are several reasons for that. First, if we compare the current share price of ENRG with the value of the assets owned by the company, then the stock looks attractive because it is relatively undervalued. But if based on such analysis, it was not onlu ENRG that has undervalued status, but Bakrie Sumatera Plantations (UNSP), Bakrieland Development (ELTY), and Bumi Resources (BUMI) are also undervalued, because these companies also have a lot of assets in their respective fields, where the value of the potential revenue and net income that can be generated from these assets, if accumulated, is also greater than the price of their shares respectively.

But does it make you dare to buy UNSP and ELTY at bottom price of Rp50 per share? If you buy BUMI then it goes down, then you can still cut the loss, but how about the two stokcs earlier? Remember that, as already discussed above, the Bakrie Group is more expert in buying and selling assets in each of their companies, rather than empower those assets to generate earnings. For example, for ENRG, they prefer instant profit from selling oil block assets at a higher price than the acquisition price, instead of drilling over the years to lift the oil contained in the blocks.

Secondly, if we look at the Bakrie Group as the controller of the company, then without any kind of analysis, you could directly conclude that ENRG and other Bakrie stocks, they all are not worth for investments! Astra Group became one of the most prominent conglomerate group in the Indonesia Stock Exchange, including stock of Astra International (ASII) become the number one blue chip stock in here, is because of the high quality of the management, where they were able to continue to grow and recorded a consistent performance, both in good and bad economic conditions.

While Bakrie? They are the worst management ever, with absolutely terrible track records. None of the companies belonging to this Group that have a consistent financial performance in the past, including the loss of Rp1.7 trillion for ENRG in 2009. I mean, in the review above we’ve already mentioned that ENRG net profit may be at least Rp5.5 trillion in the next few years, but what if there is another crisis like in 2008? Or the price of oil drops? A simple example, the sibling of ENRG, ie BUMI, is suffering heavy losses since two years ago just because the fell of coal price, whereas other coal companies in the country only suffering decreased earnings. So what if later ENRG also experiencing the same problem?

Therefore, ENRG share price may not be as low as it looks, because there are a lot of assumptions that must be met in order to fulfill the projection of net profit of Rp5.5 trillion which mentioned earlier. I also may need to  remind you that just because a company's latest financial statement is excellent, then it does not mean that we can immediately conclude that the stock are worth to buy. For a better analysis, you have to check the company's track record of performance in previous years.

Some of you may assume that the Bakrie Group might deliberately make their financial statements look bad for some reason. But even though they may actually earns big profits, it still does not make the stocks worth buying. Just use your head: Why would you invest your cash into a company that the management is deliberately manipulating its financial statements???

If I may be honest, I was surprised when I received a lot of questions about this ENRG, just because it was (for an unknown reason) suddenly rose to 30% in just less than a month, and it shows that the shares of Bakrie were still has some ‘charm’ for certain stock traders. If tomorrow the price of ENRG again increasing to, let say, Rp200 or 300 per share, then the people will be more curious to buy it. Did you know that a few years ago, the price of ENRG was at Rp1,000 per share? And I just cannot remember, how could this stock rose to that price, it was just out of mind.

But if you are a value investor, then you will understand that a stock is worth to buy not because it has gained a lot earlier, or because it has dropped a lot earlier, but because the stock was offering a value that is significantly higher than the cost to acquire it. It's that simple and.. oh, a quality and trusted management, please?