RAMBA ENERGY - Striking big with Lemang (DMG)

BUY Initiate

Price S$0.59

Previous –

Target S$0.83

We initiate coverage of Indonesia-based oil exploration and production (E&P) player Ramba Energy with a BUY and a SOTP fair value of S$0.83/share, implying a potential upside of 41%. Our SOTP valuation is based on DCF of its three O&G assets in Indonesia and its logistics arm. We like Ramba as: 1) Its 41% stake in Lemang, which was bought in 2009 for US$7m, is now valued at US$180m, 2) Stable earnings from producing Jatirarangon Field, 3) Recently won West Jambi KSO could provide it with steady gas earnings; 4) Potential renewal of its Corridor TAC (Ramba Fields) could boost valuations and TP to S$1.06.

Striking it big with Lemang. International petroleum consulting firm, DeGolyer and Macnaughton (D&M) evaluated that the Lemang Block holds a recoverable prospective 511m bbls of oil and 468bcf of gas, valuing Ramba’s stake at US$193m, while we have valued it at US$180m. Drilling on its Selong-1 well will commence in 4Q11 with a total of four exploration wells to be delivered under the PSC. It should be noted that the Lemang Block sits just a stone’s throw away from PetroChina’s Jabung Block, which is producing 135 mmscfd of gas (Upstream Online, 13 October 2009) and 58,000 bopd (The Jakarta Post, 3 May 2010).

Stable base earnings from gas. Ramba’s Jatirarangon Block provides a stable baseload of earnings for the Group. Current production runs at 3.4 mmscfd + 70 bopd. Gas produced is sold to Indonesia’s PT Perusahaan Gas Negara to which it recently secured a 70% increase in offtake price from US$2.55/mmbtu to US$4.25/mmbtu, effective April 2011. It will commence drilling of two additional wells in 2H2011 which will add 4.0 mmscfd to existing production, doubling output. The group recently won the bid for the West Jambi KSO which has a prospective 4.1 TCF of gas reserves and secured US$8.1m in funding from Perth-based, Verona Capital to expedite its three year work program on that Block, attesting to the quality of the asset.

Valuation. Our SOTP-derived value of S$0.83 is based on DCF of its assets and logistics business. We value Jatirarangon at S$22.8m, Lemang at S$179.8m, West Jambi at S$4.8m and its logistics arm at S$10.7m, which brings our Group value to S$218.0m or S$0.83/share. We have excluded the expired Corridor TAC from our valuations which could be renewed by end 2011, potentially adding S$58.1m of value to Ramba which would raise our valuation to S$268.6m and TP to S$1.06 (+80%).