Pertamina announced its unaudited 1Q16 results this morning, which,following the better than expected FY15 numbers, continue to surprise themarket to the upside.

　　As ICP/MOPS price declined even further in 1Q16 and this trend was fasterthan the drop in refined products prices, EBITDA contribution by thedownstream segment was boosted significantly to 68% of the total (vs.

　　43% in FY15 and ~6% in FY14).

　　In a similar fashion, 1Q16 revenues came in 20% lower YoY at USD8.55bn,but EBITDA more than doubled YoY to USD2.18bn resulting in a highesteverEBITDA margin of 25.5%. The company is in the midst of its costoptimisation programme which allowed it to materially reduce COGS &OPEX that declined 33% YoY to USD6.78bn in 1Q16. The managementbelieves that such an improvement in EBITDA in 1Q16 would be hard torepeat, as ICP growth would likely outpace that of fuel prices in theremainder of this year.

　　Production volumes were boosted by a 22% YoY increase in the gasoutput and totalled ~60mmboe, which puts Pertamina on track for arecord year. Oil production growth at 14% YoY in 1Q16 was higher thanthe total refining output growth at 8% YoY (mostly due to capacityconstraints), but the company still managed to reduce RON88 gasoline anddiesel fuel imports by 20% and 45% YoY respectively.

　　Last week the government decided to halve the diesel fuel subsidy fromIDR1000/litre, which should come into effect shortly. This would result in aWC release for Pertamina (due to lower receivable from the government).

　　We recall that in Mar-16 the company guided for ~USD1.3bn worth of WCrelease in FY16.

　　Improved cashflows and replacement of ST debt with LT one allowedPertamina to accumulate substantial cash balance of USD4.7bn. Thecompany maintained its FY16 capex guidance of USD3.3bn with a possibleadd-on of ~USD700m in the form of an upstream M&A. The latter, shouldit go ahead, be covered with a bridge loan, which then would berefinanced in 4Q16 or 1Q17. Company’s current ST debt balance is~USD760m, most of which would most likely be repaid using loans.

　　Given the company’s reported Total debt/EBITDA of 2.3x, we estimate thatthe Total debt has actually grown in 1Q16 to ~USD14.65bn vs. USD13.6bnin Dec-15. Given that last week the Government has revised the budgetwith higher ICP assumption of USD40/bbl (up from USD30/bbl), Pertaminawill most likely change its FY16 financial guidance too. For now it remainsas: FY16 total revenues declining further to ~USD31bn and EBITDA toUSD4.4bn. With an estimated total debt of ~USD13.4bn it gives us animplied Total leverage of ~3.05x, which is within Pertamina’s mid-termguidance of 3.5x.