PT Medco Energi Internasional Tbk (MEDC) Earnings Call Transcript

Hello, everyone. Welcome to Medco Energi Internasional's First Half 2025 Earnings Conference Call. My name is Sasha, and I'll be moderating today's session. The presentation materials are available on our website, and the recording and transcript will also be uploaded there after this call. We will begin with remarks from our senior management team, our CEO, Roberto Lorato; our CFO, Tony Mathias; our COO, Ronald Gunawan; and our Chief Administrative Officer, Amri Siahaan. After that, we'll move to the Q&A session. Thank you to everyone who sent questions earlier. We'll try to cover those first. If you have any additional questions during the call, please send them through the Zoom Q&A box with your name and company. Kindly keep your questions brief and relevant. We will prioritize pre-submitted questions, but we'll also take live questions if time permits. Please note, today's discussion is based on our unaudited interim financial statements for January until June 2025, prepared under Indonesian Financial Accounting Standards and reported in U.S. dollar. Throughout the call, we may refer to other operational or financial metrics not defined under these standards. These are meant to complement our disclosures. We may also make forward-looking statements, so please refer to the safe harbor statement and disclaimer in the presentation materials. For more details on our performance, please check the unaudited interim financial statements, earnings press release and quarterly fact book available on our website. With that, I'll hand it over to Roberto.

Thank you, Sasha, and good afternoon, everyone. Our first half results demonstrate our continued strong operational performance and disciplined financial management. Oil and gas production was in line with our first quarter, while our cash costs remain competitive at $8.5 per barrel of oil equivalent. We achieved an important milestone in June with the first oil lifting from the Forel field in Natuna Block B. This follows first production from both Forel and the Terubuk fields earlier in May, both of them inaugurated by President Prabowo. Together, these fields are expected to deliver production up to 30,000 barrels gross of oil equivalent per day by the end of the year. In Power, we delivered 1,994 gigawatt hours of sales, supported by our renewables portfolio, including the start of operations at Ijen Geothermal in February and East Bali Solar PV in June. Oil and gas expenditures was $178 million, and CapEx spending in power was $15 million. In June, we announced the acquisition of Repsol's 24% interest in the Corridor PSC. Corridor, as you know, is a high-quality, low-cost gas-producing asset that strengthens our upstream portfolio and supports our natural gas growth strategy. On the financing side, we completed several key initiatives to strengthen our capital structure. We issued a $400 million senior note and along with bank loans, refinanced our near-term debt maturities by repurchasing around $500 million of our USD bonds, reducing gross debt, extending our debt maturity profile and improving our liquidity. Following these actions, Fitch Ratings, SP and Moody's published credit updates, reflecting continued confidence in our financial discipline and stable cash flow generation. We maintain ample headroom within our BB- rating level from Fitch and S&P and B1 with positive outlook level from Moody's. Our EBITDA remains strong at $623 million, resulting in a restricted group net debt-to-EBITDA of 1.9x and mid-cycle oil prices, well below our 2.5x target. This provides us with flexibility for future growth as evidenced by the Repsol acquisition. We booked a net income of $37 million, impacted by a loss from Amman of around $31 million as they transitioned into Phase 8. The smelter began producing copper cathode in late March with sales starting in the second quarter. Lower oil prices also weighted on our results, and we recorded dry hole expenses of $8.9 million from the Barramundi exploration well in the Beluga PSC. In July, we distributed the final 2024 dividend of $38 million, bringing total dividends for the 2024 financial year to $63 million or IDR 41 per share. We remain committed to consistently rewarding our shareholders despite a volatile oil price environment. Finally, to support shareholder value and optimize capital use, we launched a share buyback program in April using internal cash. As of today, we have repurchased around 428 million shares. This reflects our confidence in the company financial position, prospects and long-term value creation. Next slide. In June, we announced the acquisition of Repsol's 24% participating interest in the Corridor PSC for $425 million, funded through a mix of internal cash and new debt. The transaction is now closed, increasing Medco Energi ownership from 46% to 70%. This is fully aligned with our strategy of focusing on low-cost, profitable assets with manageable risk and growth potential. Corridor is a high-quality, cash-generating gas asset supplying 7 buyers under fully contracted long-term gas sales agreements. This agreement secures stable and predictable cash flows, both from Indonesia and Singapore. The block comprises 7 producing gas fields and 1 oil field, supported by established infrastructure and a series of ongoing exploration and development programs. The acquisition was made at an attractive valuation of around $7 per barrel of oil equivalent for the 2P reserves. It will deliver an immediate production impact of over 25,000 barrels of oil equivalent per day. And at our mid-cycle oil prices, we expect this asset to generate around $145 million of incremental EBITDA in 2026, including $90 million from fixed price gas contracts. Following the announcement, credit rating agencies issued updates acknowledging the transaction, citing our manageable leverage and sufficient headroom. Corridor is one of the biggest gas producers in Indonesia and will continue to be a core contributor to our production and cash flow in years to come, supporting both shareholder returns and future growth. I will now pass on to Ronald for an overview of our operational performance.

Thank you, Roberto. Good afternoon, everyone. In the first half of 2025, our production was maintained at 143,000 barrels oil equivalent per day. This was about 7% lower compared to the same period last year due to the challenges from gas demand scheduled maintenance and a few project delays. Our first half 2024 production also still included contribution from Vietnam Block 12W, which we divested last year. Production will ramp up in the second half, primarily driven by contribution from new projects, Forel and Terubuk fields in Natuna, Corridor LTR gas expansion, Suban development drilling, Bisat-C processing facilities expansion at Block 60 and post completion of maintenance program at Senoro. Following the acquisitions of Repsol 24% interest in Corridor PSC, we have updated our 2025 production guidance to 155,000 to 160,000 barrels oil equivalent per day for 2025. This year, our production mix is relatively balanced with 48% sold under long-term fixed price, take-or-pay domestic gas sales agreements, which provide consistent revenue streams and reduce the effect of oil price volatility. The financial impact of this will be further detailed in the financial performance section. The remaining 52% of production exposed to the market price environment, including 24% of exported gas, which is indexed to oil prices. We have consistently maintained our oil and gas cash costs below $10 per BOE since 2016. And in the first half of 2025, we recorded the cash cost of $8.5 per BOE. CapEx spending for oil and gas in the first half of 2025 was $178 million as we continue our drilling programs at Natuna, Oman Block 60, Corridor and Senoro Phase 2A. Following the Repsol acquisition, we will continue to high-grade our capital spend. And despite the higher working interest and active programs in Corridor, our full year CapEx guidance remained unchanged at $400 million. As of June 30, 2025, our 2P reserve life stood at 10.7 years, supported by a sustainable reserve base that remained above 10 years since 2023. We have achieved a 5-year average reserve replacement ratio of 163%, adding more reserves than our production. Our average 2P finding, development and acquisition costs during this period was $5.4 per BOE, highlighting the efficiency of our reserve growth efforts. Next slide. Let me now highlight the progress of 2 of our key oil and gas assets, Natuna Block B and Bangkanai as we continue to maximize the value of our existing portfolio. Starting with Natuna Block B, we are on track to improve our production and extend the asset's economic life beyond the current PSC period, supported by Forel production and drilling activities at Terubuk Field, where the remaining wells are expected to come on stream by third quarter 2025. We are also progressing discussion on PSC extension, supported by strong engagement with the government. For Bangkanai PSC, this asset was part of Ophir Energy acquisition in 2019. Since then, we have made steady progress in converting its resources into reserves through phase expansion of gas production facilities. Phase 1 facilities are currently producing 20 million standard cubic feet per day from Kerendan field, while Phase 2 is targeting to ramp up gas delivery from Kerendan Field to 55 million standard cubic feet per day by early 2029. To increase the offtake and commercialization, we have completed 130 kilometers pipeline study and are working with our partners to deliver 35 million cubic feet of gas from our facilities to a planned mini LNG plant located in [ Melaka ] with first gas targeted in Q1 2029. This offtake is expected to be delivered under the PSC extension period, which would support production through 2053. To ensure the viability of these projects, Phase 2 plan of development and PSC extension applications are currently in progress. I will now pass on to Amri for an overview of power operational performance.

Thank you, Ronald. Good afternoon, everyone. In this first half of 2025, IPP power sold was slightly lower at 1,994 gigawatt hours, mainly due to Riau IPP maintenance, an earthquake affecting Sarulla Geothermal and flooding at the Sumbawa PV plant. We commenced operations at 2 new renewables assets, the 35-megawatt Ijen geothermal and the 25-megawatt Peak East Bali Solar PV project, resulting in a 21% year-on-year increase in renewable sales. This growth strengthens our revenue diversification. Looking ahead to the second half, we expect increased output in Q4 from the streaming of the Energi Listrik Batam expansion project, also known as ELB add-on project, supporting our trajectory to meet the revised full year 2025 sales target of 4,300 gigawatt hours. We are also growing our operations and maintenance business through the Timor and Sulut projects. Power CapEx in the first half of 2025 reached $15 million, mainly for the completion of the Ijen Geothermal and East Bali Solar PV project. In the second half, we will focus on completing the 39-megawatt ELB expansion project expected to begin commercial operations in Q4 2025. Next slide, please. We continue to prioritize organic growth in our renewables portfolio. Over the past few years, we have made strong progress and remain committed to expanding our renewable energy supply through internal development. This commitment is gaining recognition, including from the government as seen in the increased national attention to our renewable projects. In February, we began commercial operations at the Ijen geothermal power plant in [ East Java. ] The first phase contributes 35 megawatts to the [ Java ] grid under a long-term power purchase agreement, or PPA, with PLN. Once fully developed, the project is expected to reach 110 megawatts capacity, supplying electricity to around 85,000 households while helping to avoid up to 230,000 tons of CO2 emissions annually. Ijen is our second geothermal facility after Sarulla and is part of our long-term commitment to support Indonesia's energy transition. We are currently advancing a feasibility study for the Phase 2 expansion, which will add another 20 megawatts. In June, we also started commercial operations at the East Bali Solar PV plant, now the largest utility scale solar project in Bali. With 25 megawatts peak capacity, it will generate around 50 gigawatt hours annually, supplying electricity to about 42,000 households and avoiding over 800,000 tons of CO2 emissions over its lifetime. We are also engaged in a feasibility study to support further expansion of our domestic solar PV portfolio. Both Ijen Geothermal and East Bali Solar PV demonstrate our continued progress in building a renewable energy portfolio that supports national climate goals and aligns with our company's long-term sustainable strategy. Looking ahead, we are enhancing our efficiency of ELB, our independent power producer in Batam. ELB currently operates a 70-megawatt gas-fired power plant, which supplies electricity to PLN Batam under a gas supply agreement until December 2028. The facility is now being upgraded with a 39-megawatt combined cycle expansion, utilizing exhaust gas heat from the existing unit to generate more efficient electricity for the Batam Bintan grid. The energy conservation project is targeted to start operations in the fourth quarter of 2025. Next slide, please. We continue to strengthen our efforts in managing climate risks and supporting energy transition. We established our climate change strategy and net zero target in 2021, followed by interim targets in 2022 as part of our commitment to taking meaningful climate actions while continuing to deliver reliable, affordable, sustainable energy and natural resources. Since then, we have actively tracked and reported our Scope 1 and Scope 2 GHG reduction emissions. And this year, for the first time, we also disclosed our assured Scope 3 GHG emissions in our 2024 sustainability report to better understand impacts across our value chain. This slide highlights the steady progress we have made in integrating climate considerations into our operations. By 2024, we achieved Scope 1 and 2 GHG emissions reductions of over 1.5 million tons of CO2 equivalent from the 2019 baseline, exceeding our 2025 interim reduction target of 1.08 million tons or a 20% reduction. Methane emissions have also declined by 46% compared to 2019, well ahead of our 2025 target of 25% reduction. This progress comes from 43 emission reduction initiatives across our operations, onshore, offshore and international, including flare avoidance in Corridor, solar panels installations in Natuna and Sampang, diesel generator conversion to grid power in Oman and biodiesel use for supply vessels in Thailand. Aside from GHG and methane reductions, we have surpassed our 2025 renewables installed capacity target of 26%, reaching 27% in first half 2025. Our ongoing commitment to sustainability and ESG improvements continues to gain recognition. This year, Medco Energi was named Runnerup in the : ASEAN Risk Champion Awards 2025 for our integrated approach to risk management across the business. In 2024, we achieved an upgrade from A to AA in the MSCI ESG ratings, placing us in the Leader category and reflecting our progress in managing key ESG risks and opportunities. We also maintained a B score in CDP climate change disclosure, placing us in the management-level band and above the average for our sector, [ ASEAN ] and global peers. Medco Energi remains part of the IDX LQ45 Low Carbon Leaders and the IDX KEHATI ESG Sector Leaders, reaffirming our position as a responsible and sustainable operator. You can access the full 2024 sustainability report on our website for further details. I will now pass on to Tony for an overview of our financial performance. Thank you.

Okay. Thank you, Amri. Good afternoon, everyone. As you saw, our first half results came in slightly lower year-on-year across several metrics. Revenue was down about 2% compared to last year. Now oil and gas revenue remained relatively solid despite lower production volumes year-on-year and as I think you're aware, an almost $11 drop in Brent prices. So the resilience in oil and gas revenue was really the result of a number of projects in Block B, namely Forel and Terubuk being placed in service. The way the PSC mechanism works, you spend capital once you place that asset into service, it starts delivering, then you begin to get a step-up in cost recovery. So for a few years now, we'll receive higher cost recovery in Block B. Conversely, power revenue declined 23% year-on-year, primarily due to the way the accounting standards require us to book construction revenues on BOT IPPs. So in some ways, the converse of what happens in the PSC. First half EBITDA was $623 million, down 4% year-on-year. That's despite that relatively large drop -- percentage drop in commodity prices I referred to earlier. Fixed price gas, of course, also supports us when prices drop with fixed price gas contracts accounting for around 50% of our gas sales in the first half. That's about $195 million of EBITDA, just over 30% of the EBITDA in that period. Net income also down, a substantial decline from the same period last year, largely due to the loss we booked on Amman. As Roberto noted, and as has been expected, their mine operations are transitioning to Phase 8. And of course, the smelter was being commissioned. However, Amman's earnings began to recover in the second quarter with the first copper cathode exports and sales and now also the commissioning of the precious metal refinery, which produced its first gold in mid-July. At the end of the first half, we're carrying about $180 million of additional debt, so negative carry, as we call it. That's ahead of IDR bond repayments due in the second half of this year and also into early 2026. Absent that negative carry, debt continues to drop quarter-on-quarter. And finally, for the balance sheet, we ended the year -- the half year, sorry, with $883 million of cash and cash equivalents and a significant amount of undrawn committed bank facilities. This level of liquidity provides us with the capacity to continue to manage our debt repayments, meet our commitments, especially post recent acquisitions and to be in a position to capitalize on further organic and, of course, inorganic growth opportunities that we continue to review. Next slide, please. I want to close with summarizing a message you've heard before, but it's about how we continue to deliver value to both equity and credit stakeholders, starting with equity. We will remain disciplined in our investments. And I want to highlight the fact that post the Repsol acquisition, we've increased our production guidance for the year, but we have not increased our capital guidance for the year. So scale has grown, but we will high-grade our opportunities as we've done in the past. And we've also, of course, maintained our unit cost guidance. It's one of the reasons our share price has consistently outperformed Brent and also outperformed LQ45, the local Indonesian index. In 2025, to date, we've distributed dividends of IDR 41 per share. And we aim to sustain our shareholder returns aligned with company performance and market conditions. And we will review the position again carefully as we consider the interim dividend we intend to pay later this year. Of course, this year -- earlier, we also expanded our share buyback program, buying a total of 428 million shares to date, almost $30 million. And this underscores management's continued belief in the long-term value of our stock. Turning to credit. We maintained strong access to a well-diversified mix of funding sources. In the first half, we engaged with international, regional and especially local banks, expanding our portfolio of local banks. And we also accessed the local and international capital markets to both refinance debt and of course, to finance acquisitions, generally on improved terms. And in June, we repaid 2 oil and gas banking facilities. One was secured, one unsecured. We repaid them using cash and in both cases, lower cost facilities. Of course, we issued bonds, both rupiah and U.S. dollar in the half year, and we launched tender offers as part of our continuing proactive debt management strategy. These efforts have strengthened our capital structure while maintaining a competitive cost of debt. In summary then, I think we performed well operationally with strong liquidity, diverse access to capital, now a balanced -- a more balanced debt maturity profile, and we continue to control our cost of debt. Our capital management strategy is anchored in disciplined investment and a 2- to 3-year post-acquisition debt repayment cycle, which we will maintain for the recent Repsol acquisition. And this gives us the flexibility to pursue further growth and to continue to return value to shareholders. The Board has built a foundation that has consistently outperformed peers in both return on equity and total shareholder return and created a repeatable cycle of value creation. With that, I'll pass back to Roberto, who will summarize an outlook for 2025. Thank you.

Thank you, Tony. Let me now walk you through our 2025 guidance. We are expecting production to increase to a run rate of around 180,000 barrels of oil equivalent per day in Q4, which will allow us to close 2025 with annualized production of 155,000 to 160,000 barrels of oil equivalent per day. This will be driven by ramp-up in Block B, Senoro and Oman Block 60 production and supported by the 24% working interest acquisition in the Corridor Block. For Power, we have revised our full year sales target to around 4,300 gigawatt hours, with contribution from Ijen Geothermal, East Bali Solar PV and the Q4 COD of the ELB expansion. Capital expenditure for the year is guided at around $430 million. That includes $400 million for gas-related projects in Natuna Block B and Corridor. Drilling activities in Oman Block 60 and [ well 1 ] and remains unchanged despite the purchase of Repsol, while Medco Power will spend the remainder of $30 million full year guidance to complete the ELB expansion. Our unit oil and gas cost will stay below $10 per BOE. We will see a temporary increase in our restricted group net debt-to-EBITDA ratio next quarter due to the Corridor acquisition financing; however, we are maintaining our target to stay below 2.5x and mid-cycle oil prices of USD 65 per BOE. Our return on equity currently stands at around 10%. Despite market volatility, we remain focused on creating long-term value and maintaining a stable return for our shareholders. How we move through the second half, we will continue to manage our portfolio proactively. The Corridor acquisition is a good example of our growth strategy, and we continue to review other opportunities that align with our long-term goals. In Tanzania, we secured an exploration license extension for Blocks 1 and 4, while engagement with the government towards agreement on the full development plans is ongoing. On Senoro Phase 2A, we have completed drilling and well testing and are progressing with the construction work. For corridor, we completed 3D seismic acquisition of Rebonjaro and Sumpal Fields, covering a total area of over 400 square kilometers as part of our $50 million multiyear program to unlock future reserves potential. We will continue to prioritize acquisition debt repayment within 2, 3 years, while remaining committed to future dividend payments subject to company performance and market conditions. In power, we are pushing forward with the Ijen and Batam IPP's expansions while progressing the Bulan solar PV project. And finally, we remain focused on our climate change strategy by investing in renewables, integrating climate considerations across our operations and upskilling our teams to help drive this transformation. With this, I think our presentation is complete, and I propose that we move on now on to the Q&A session. Over to our moderator, Sasha, please.

Thank you, Roberto. That concludes our remarks. Now we will begin the Q&A. [Operator Instructions] Let's begin with the first question, which is from Mr. Andhika Suryadharma from [ PT ] Sun Life Financial. On the Corridor acquisition, would you be able to share the impact on production guidance? I think this one is for you, Roberto.

Thank you, Sasha. As mentioned earlier, the acquisition of Repsol's 24% interest in Corridor contributes an immediate production increase of around 25,000 barrels of oil equivalent. This, combined with the ramp-up from Corridor's LTR gas expansion and Suban development drilling and the first production from both Natuna Forel and Terubuk and the completion of the Senoro maintenance program and finally, the expansion of Oman Block 60 Bisat processing facility will lead to a Q4 run rate of around 180,000 barrels of oil equivalent. So as a result, we anticipate that our average annual production for 2025 will increase to approximately 155,000 to 160,000 barrels of oil equivalent from the original 145,000, 150,000 barrels of oil equivalent.

Next question. Roberto, there are some analysts who ask similar questions on Corridor acquisition. Which debt facility do you plan to utilize for this? The second one, what is the split of fixed versus index price gas from the corridor asset? The third one, any update to Corridor's 1P reserve during the June 2025 recertification? If so, what is the upgraded number? And the last one, what is the economic date of 1 January 2025 that you have mentioned in the slide? Does it mean the cash flow generated from January to July 2025 completion date is offset from the purchase price?

Okay. Thank you. So let's start with the debt facilities. The acquisition price of USD 425 million has been funded using 34% cash and 66% debt. The loan facility has a floating interest rate of SOFR plus 3% to 4% per annum, and it has a 2.5 years tenure, which is in line with our strategy of repaying acquisition debt within 2 to 3 years. As far as the split of fixed versus index price gas from the Corridor assets, as of the first half of 2025, approximately 80% was fixed price and 20% of those gases were index price. In terms of reserves, the 1P reserves were recertified on 31st December 2024, and they increased from 74 million to 84 million barrels of oil equivalent. At the same time, the 2P reserves also increased from 107 -- 107 million to 121 million barrels of oil equivalent. Finally, yes, it is correct. The economic date refers to the effective date from which the economic benefits and risks of the asset transfer to the buyer. Net cash flows between the economic date and the completion date are offset from the purchase price. I hope this is satisfactory.

The next question is from Mr. Umar Manzoor, Allianz Global Investors What is the corridor's production level in first half 2025? It seems it has declined by over 10% from 2024. Ronald, this is for you.

Thank you, Umar, for your question. Corridor is producing gas to meet our contractual gas demand from our existing gas buyers. We have 7 gas buyers, 1 from Singapore and 6 from domestic. In first half 2025, Corridor producing [ 613 ] BBTU per day and meet all the contractual gas demand from our gas buyers. As you know that since 2021, Corridor has been off plateau; however, we are continue managing Corridor's natural decline through our Accelerated Corridor Development program we call ACD program that consists of production and facility optimization. We continue with the development drilling in Suban area, and we develop -- continue developing our discovered resource opportunities. And we are -- continue also with the near-field exploration activities.

The next one from Mr. Umar Manzoor from Allianz Global Investors. Would you be able to share any details of the maturity profile of the 2 syndicated loans, $500 million and $297 million and the approximate cost of these facilities [indiscernible] ?

Sure. So let me start with the $297 million. This isn't a new facility. It's quite an old facility. It's secured against the shares of Senoro and Block A. The underlying borrowing base is gas contracts within those assets. As I say, it's not new. It's a revolving facility and we repaid it fully in June. It's -- you'll still see it on our financial statements going forward because it is revolving. It's revolving and secured, but now fully paid down. But it's undrawn and committed. So yes, you'll see it for several more quarters. If we draw again, then it would be due -- it's amortizing due for repayment 2028 if we draw again. The $500 million facility is a new facility, but it's a refinance of the contracts underlying our Corridor interest. It's unsecured, and we partially drew it to pay for the Corridor Repsol purchase. The bulk is undrawn. It also is amortizing would be -- or is fully repaid end of 2028. Both are SOFR plus 3% to 4%. For your information, you should also note we signed 2 new unsecured rupiah loans from domestic banks in the quarter, which we swapped into U.S. at fixed 5%. And yes, you will see more details of that in our financial statements. One -- both of those are partially drawn. We used some of it to repay the more expensive $297 million. I hope that answers your question. Again, let me know if you need more.

Okay. The next question is from [ Mr. Faizun Muhtada from PEFINDO. ] Any upcoming corporate action in Oman and/or other regions to boost production to be higher than current guideline? I think this one is for you as well, Roberto.