1Q23 results: Power to the rescue. MEDC posted positive topline growth in 1Q23, with a revenue of USD 558 million (+14% yoy), driven mainly by its power business (USD 111 million, +255% yoy). Meanwhile, O&G sales slipped to USD 393 million (-1.6%) on the back of the decline of crude oil ASP to USD 77.1/bbl (-22.3% yoy) despite higher O&G production of 165 mbopd (+29.9% yoy). MEDC posted an operating profit of USD 178 million (-10.9% yoy); the decline was mainly caused by lower O&G margin (53%, -220 bps) and higher OpEx (USD 54 million, +29.9% yoy). The company’s operating margin fell to 32% (-894 bps). MEDC booked a flattish EBITDA of USD 325 million (+3.8% yoy) and a bottom line of USD 80 million (-11.3% yoy), falling short of ours and cons.

Oil prices to stabilize as Saudi hints production cuts. The recent drop in oil prices (due to weak demand from the US and China) led to a decline in MEDC’s ASP to just USD 77/bbl in 1Q23, compared to USD 100/bbl in 1Q22. However, we cut our FY23F Brent price projection to USD 80/bbl as Saudi and OPEC+ countries hinted that another production cut is in the works. Recently, OPEC+ made another oil production cut of approx.. 1.16 mmbopd, bringing its total production cut to 3.66 mmbopd (3.7% of global oil demand). Our normalized yet elevated oil price thesis is also supported by the decline in US crude inventories, which we believe will continue in the upcoming quarters; however, weak demand from China and the US might be a risk for the price rally, prompting us to cut our projection.

Normalizing oil prices, lower margins = lower forecast. This year, we believe MEDC will reap huge revenue from its gas business, especially with the new GSA contract for the Corridor block and a higher ASP of USD 7.7/mmbtu, which should give MEDC’s O&G business a leg up. However, due to the business’ low margin nature, we have to cut our margin projection to 51%, thus lowering our EBITDA and earnings estimates to USD 1.1 billion and USD 314 million, respectively. Our earnings revision was justified by our recent oil price projection cuts, and with the Ijen Geothermal project coming in full swing, MEDC should experience lower margins from its power business. Furthermore, we are still waiting for the green light for AMNT’s IPO, since it might become a positive catalyst for the slumping MEDC shares (-21.56%.YTD)

BUY, TP IDR 1,600. We maintain our bullish view on MEDC, giving it a BUY and a SOTP-based TP of IDR 1,600, reflecting 4.7x FY23F EV/EBITDA. Main Risks: Declining O&G prices and lifting volume.