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Giken – A Potential Indonesia Onshore Oil Field Play
Corporate Digest | 06 October 2014
By: Ernest Lim
Articles (134) Profile

Most people would have shunned the following stock, given that it has skyrocketed 800 percent from $0.035 on 18 Feb 14 to $0.315 on 1 Oct 14. This is notwithstanding the series of shares placement which Giken Sakata (Giken) has done since Feb.

Chart 1: Giken has skyrocketed 800 percent since 18 Feb 14

Source: CIMB chart as of 1 Oct 14

What Piqued My Interest?

Giken seems to be a potential onshore Indonesia oil play. After doing some research on Giken, armed with my queries, I decided to connect with Giken’s management to understand more about their company and their prospects.

Mr Sydney Yeung, CEO of Giken (“Management”) promptly agreed to meet me for an exclusive chat over coffee.

    Key Takeaways From The 1-1 Meeting

  • Interesting Business Model – Old Wells Programme
  • For their onshore oil production business, Giken, through PT Cepu operates through the following manner:

    a) Pertamina, Indonesia’s state-owned oil and gas company signs a Mother Agreement with the local co-operatives (e.g. KUD / BUMD);

    b) The local co-operatives will sign a Cooperative Agreement with PT Cepu (i.e. Giken) to produce oil. The revenue split for this cooperative arrangement is typically 20 percent (local co-operatives) and 80 percent (PT Cepu).

    According to Management, Giken is the only player in this old wells programme for the whole of Indonesia. They believe that the above arrangement is beneficial to all three parties.

    Firstly, the oil produced from the old wells must be sold to Pertamina at approximately 70 percent of Indonesian crude price (“ICP”).

    Without this arrangement, Pertamina would have to source the oil from other parties, which is likely to be on less favourable prices.

    Secondly, the local co-operatives which are the local governments would stand to benefit from the arrangement.

    Their villagers would be able to enjoy a higher standard of living, as some of them would be employed by Giken. The local governments would also be able to enjoy 20 percent of the revenue obtained from the sale of oil to Pertamina.

    Thirdly, for Giken, they have nothing to lose. Their production cost is about US$20 / barrel of oil, thus the profit margin is still considerable, despite the revenue split between local co-operatives and Giken and the discounted selling price of the oil to Pertamina.

    In addition, Giken has less business risk as they have a guaranteed buyer i.e. Pertamina.

  • Extremely Limited Exploration Risk
  • Giken utilizes “twinning” strategy where they drill new wells beside the old wells. These new wells are sturdier, more operation friendly and can be deeper than the old wells to increase the yield on each well.

    As the new wells are drilled beside the old wells which were previously producing, exploration risk is minimal.

  • Short Payback Period, Cash Flow Generative Operations
  • According to management, their business model and strategy offer a short payback period of approximately 5-6 months. Once the oil wells start producing, it generates cash flow immediately.

    Capex is low for each well as these are simple onshore wells. Management estimates the capex for each well to be approximately US$120,000-160,000. Part of the drilling capex can be funded by its existing production.

  • Highly Scaleable Model – Likely Growth In The Next Couple Of Years
  • With reference to Giken’s announcement on 22 Sep 14, Giken stated that it has increased its production from its Dandingilo-Wonocolo (“D&W”) and Tungkul fields by 31 percent from (14 wells) 670 barrels of crude oil per day (“bopd”) in June 14 to (15 wells) 880 bopd in Sep 14. There are two noteworthy points on the above figures.

    a) The above production update only pertains to 15 wells from D&W and Tungkul fields. D&W and Tungkul fields have a total of 139 wells.

    b) As mentioned above, the production update pertains to D&W and Tungkul fields. Giken has a total of five fields now with a combined number of 300 wells. Even without new expansion, there is likely to be enough work for Giken for several years.

    Going forward, management expects to drill three to four wells each month. This should speed up production and subsequently their profitability.

    Management added that they may consider building tank farms once their production hit a significant level.

  • Selling Price To Pertamina Fixed Yearly
  • Pertamina fixes the selling price of the oil at approximately 70 percent of ICP. According to management, this price is reset annually. Naturally, there are both positive and negative aspects to such an arrangement.

    However, my personal view is that with this arrangement, there is some stability to Giken’s business operations, unlike other oil & gas plays which may be extremely vulnerable to short term swings in oil prices.

  • Senergy Commissioned To Prepare Reserve Report On Kawengan, Trembul And Gabus Fields
  • There was a valuation report prepared by Senergy Oil & Gas (Singapore) Pte Ltd (“Senergy”) which valued the D&W and Tungkul fields to be worth a (best scenario) net present value of US$195m based on a 10 percent discount rate (See Table 1 below).

    With reference to Giken’s announcement today, Giken has commissioned Senergy to prepare a reserve report on Kawengan, Trembul and Gabus fields.

    It is noteworthy that Kawengan, Trembul and Gabus fields have a total of 161 wells vs the 131 wells from the D&W and Tungkul fields. Furthermore, according to management, their data showed that Trembul and Gabus fields have deeper oil wells than the other fields, providing greater potential for the production of oil.

    Thus, based on my (purely) layman perspective, the Senergy reserve report on Kawengan, Trembul and Gabus fields may likely yield a figure comparable to US$195m, similar to that of D&W and Tungkul fields.

    This is likely to (at least) add some assurance to Giken’s shareholders and may raise the overall valuation of Giken.

  • Indonesia – Committed To Increase Domestic Oil Production
  • Indonesia, a former OPEC member, has been a net exporter of oil till 2008 where they became a net importer. Falling oil production has hit Indonesia hard.

    Thus, they are likely to continue their push towards increasing domestic oil production which should bode well for Giken. It is noteworthy that Indonesia has more than 10,000 old wells, thus the growth opportunity for Giken is significant.

  • Existing Contract Manufacturing Business Likely To Do Better
  • Giken’s 1HFY14 revenue and net profit from the contract manufacturing business were S$38.5m and S$708K respectively.

    Although their contract manufacturing business environment is likely to continue to be competitive, management expects their results to gradually improve in the next two years.

    Jokowi To Suspend Operations At Pertamina Unit → No Impact To Giken

    With reference to a Business Times article on 24 Sep, it was reported that Mr Joko Widodo plans to halt operations at Pertamina’s energy trading unit Petral.

    However, according to management, this has no impact to Giken as they do not deal with Petral. ‎They sell their oil only directly to Pertamina and not its subsidiaries.

    Investment Risks

    Customer Concentration Risk

    For the oil produced, Giken can only sell to Pertamina who has the right to set the selling price and the exchange rate.

    Although there seems to be a large customer concentration risk on Giken’s aspect, I will like to draw readers’ attention to the following points which may alleviate the risk to a certain extent:

    a) Pertamina is buying a minuscule portion of the oil it requires from Giken. Even if Pertamina prices the oil at 70 percent discount to ICP, it is unlikely to result in meaningful cost savings for Pertamina.

    b) Giken is the only player in this old wells programme for the whole of Indonesia. Furthermore, Indonesia has more than 10,000 old wells, and as Indonesia is looking to increase their domestic production, it is likely that Pertamina wants a cordial working relationship with Giken.

    Ability To Extend Agreements

    The ability for Giken to extend the Cooperative Agreement with the local co-operatives and to sign new Cooperative Agreement are key factors for Giken’s long term growth.

    Furthermore, the ability for the renewal of the Mother Agreement between Pertamina and the local co-operatives is important too.

    It is noteworthy that Giken is currently producing oil from 15 wells out of their 300 wells. Even without new Cooperative Agreements, there is likely to be enough work for Giken for several years.

    Limited Track Record In Producing Oil

    Based on limited published figures, Giken’s oil production has risen from 300 bopd to 880 bopd in less than six months. However, there is limited data (we need more data over time) to ascertain management’s track record in oil production.

    Foreign Country Risk

    Giken’s onshore oil business operates in Indonesia hence they are subject to Indonesia’s politics, laws and regulations. Any adverse change in the above factors is likely to have a negative impact to Giken.

    Senergy Report

    Based on Table 1 above, although Senergy estimated that D&W and Tungkul fields are worth a (best scenario) net present value of US$195m based on a 10 percent discount rate, it is noteworthy that the actual stake Giken has in the fields are likely to be worth less than US$195m. See Figure 1 below on the corporate structure.

    Source: Company, Voyage Research

    Limited Analyst Coverage

    Only Voyage Research covers Giken with a potential price of $0.450. I.e. there is limited analyst coverage. It is reasonable to say that the investment community is still not familiar with Giken, especially to its foray into the onshore oilfield in Indonesia.

    Management is cognizant and is doing their best to raise the awareness of the investment community on Giken.

    Giken’s Chart Analysis

    Based on Chart 1 above, Giken has been trading within the range of $0.315 – $0.360 since 9 Jun 14. It seems to be testing the support of $0.315-0.320.

    A sustained break below $0.315 points to a measured technical target price of around $0.275. However, there are multiple levels of support from $0.300 – 0.310 due to the placement price at $0.300, Fibonacci level and 100D EMA. Resistances are at $0.330 – 0.335 / $0.350 – 0.360. A break above $0.360 negates the slight negative bias of the chart.

    Conclusion – This Is Just An Introduction

    In short, Giken seems to be a budding Indonesia onshore oil play. Short payback period, cash flow generative operations, guaranteed customer and favourable Indonesia dynamics etc. are points which interest me. However, it is noteworthy that customer concentration risk, ability to extend agreements and limited track record are some factors which readers should be aware of.

    Readers who are interested should take a look at their website for more information. You can also email me at crclk@yahoo.com.sg for the analyst report on Giken.

    Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

    Please click here for more information about this author.


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