Information Disclosure – EMP’s 1Q 2015 Financial Results

Dear fellow shareholders, equity & fixed income analysts, and equity sales officers:

As you know, we have just issued our Company’s consolidated 1Q 2015 financial report which showed a Net Loss of $16.6 million.  We have received questions about such result, considering that EMP recorded positive financials during Full Year 2014, which include Sales of $811 million, EBITDA of $476 million, and Net Profit of $37 million.

We hope that this Information Disclosure can explain about the reasons for such 1Q 2015 results. In general, there are two main reasons, the lower Oil Price and the higher Depreciation Cost, that contributed to the Lower Sales Revenue and the Higher Cost of Goods Sold in the 1Q 2015 period. As a result, EMP booked Operating Loss of $8.6 million and Net Loss of $16.6 million during the same period.

 

THE FIRST REASON.  In the Year on Year basis (1Q 2014 vs. 1Q 2015), EMP’s average oil selling price had gone down significantly by over 45% to only $ 50.95 per bbl. While this is experienced by all of the oil producers due to the deteriorating world’s oil price since the 3rd quarter of last year, EMP Sales revenue took a big hit and consequently dropped by almost 17% in the 1Q 2015 from the same period of last year. The only reason why our Sales did not go down as severe as the deteriorating oil price was the fact that gas (which has long term, increasing domestic price trend contract) makes up almost 60% of our production volume.

 

THE SECOND REASON.  Additionally, EMP, just like all of the listed companies in Indonesia, is now required by the Indonesian Government to use the IFRS accounting method starting in year 2015. This means, we all must abandon our previously used Indonesian GAAP accounting method. In particular, within the industry of upstream oil & gas, the newly IFRS principles require different approach in calculating our Depreciation, Depletion, and Amortization Cost (DDA Cost).

 

In the oil & gas industry, the DDA Cost is calculated more or less as follow:   DDA Cost = (Production / Reserve Size) x Oil & Gas Assets.  The GAAP method allows us to apply such formula to the sum of the individual reserves, productions, and assets belonging to multiple projects owned by EMP. On the other hand, the IFRS method requires us to use the formula to calculate the DDA Cost in each project first, before adding them up together.

 

Thus, in the case of a growing company, such as EMP, which within its portfolio has some projects with relatively large oil & gas assets, aggressive production rate, and small to medium scale reserve size, then the IFRS method translates into LARGER DDA COST (Compared to the GAAP approach). The following is a sample case of the different DDA Cost when calculated by the 2 methods (GAAP vs. IFRS).

 

 

Project A                                                                                                     Project B

 

Production = 2 barrels                                                                    Production = 10 barrels

Reserve size = 30 barrels                                                             Reserve size = 80 barrels

Oil & Gas assets = $5,000                                                             Oil & Gas assets = $95,000

 

DDA Cost (GAAP) = {(2 + 10) / (30 + 80)} x ($5,000 + $95,000) = (12/110) x $100,000 = $10,909

 

DDA Cost (IFRS) = {(2/30) x $5,000} + {(10/80) x $95,000} = $333 + $11,875 = $12,208

 

CONCLUSION: DDA Cost is higher when calculated using the IFRS method

 

 

In any case, despite the above challenges that we have to overcome, EMP manages to improve its liquidity ratios. The Company’s success in reducing its outstanding debt and refinancing the old debt with the new one at lower rate has resulted in lower interest cost and improved liquidity ratio. In the 1Q 2015, EMP recorded Net Debt to Equity ratio and Interest Coverage ratio of 0.51x and 7.4x respectively. Both slightly improved from the last year’s performance. 

 

Going forward, EMP is expected to grow its production organically (from the Bentu gas asset in Sumatera), benefit from the increasing trend of domestic gas price, continue to deleverage its balance sheet and reduce interest cost, and monetize the Buzi gas project (Mozambique, Africa) and the Kangean’s South Saubi offshore oil prospects (East Java). Having said that, we, like the rest of oil producers, hope that the world’s oil price would recover soon.

 

Financial Highlights (‘000 US$)

1Q 2014**

1Q 2015

Net Sales*

193,843

161,422

Cost of Goods Sold

117,447

158,708

Operating Income (Loss)

72,210

(8,655)

EBITDA*

120,185

84,359

Financing Charges*

(20,993)

(11,294)

Net Profit (Loss)

23,721

(16,656)

 

 

 

 

FY 2014**

1Q 2015

Cash, Short-Term Investment, Restricted Cash

152,298

172,318

Debt (Bank Loans)

520,920

501,848

Equity

669,455

647,374

FY2013

FY2014

 

Ratios Highlights

FY 2014**

1Q 2015

Debt To Equity

0.78x

0.77x

Net Debt To Equity

0.55x

0.51x

Interest Coverage Ratio

5.73x

7.47x

 

 

 

Price & Production Highlights

1Q 2014

1Q 2015

Average Oil Price

US$ 93.20/bbl

US$ 50.95/bbl

Average Gas Price

US$ 5.8/ mcf

US$ 6.13/ mcf

Average Oil Production

12,730 barrel/ day

11,718 barrel/day

Average Gas Production

231 million cubic feet/ day

217.8 million cubic feet/day

         

 

*) Includes ONWJ revenues, financing charges & EBITDA based on 36.7205% WI.

**) restated
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For any questions relating to this disclosure, please contact Herwin W. Hidayat (Investor Relations) at +6221-2994 1500. Other related Company information can be found at www.energi-mp.com

Information Disclosure – EMP’s 1Q 2015 Financial Results

 

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