Jan. 30 (Bloomberg) — During a sultry Jakarta evening in
late November, Hilmi Panigoro, chief executive officer of PT
Medco Energi Internasional, turns to two guests at a sprawling
corporate residence. “Maybe I can play the piano for you, he
says with a smile.
Panigoro, 52, head of Indonesias largest publicly traded
oil company, is a guitar virtuoso temporarily without his
favorite instrument. So he walks across the living room, parks
at a black Yamaha grand piano and plays a medley of pieces from
memory that combines classical and jazz with a 1971 pop hit
called “If.
These are mostly festive times at Medco Energi, the
Jakarta-based company founded by Hilmis older brother Arifin,
62. The Panigoros assets top $1 billion, according to Hilmi. In
a country that long thrived on the business savvy of ethnic
Chinese, the brothers — often seen wearing traditional batik
shirts — have made their mark as Indonesias dominant ethnic-
Indonesian entrepreneurs.
Only three years ago, the Panigoros were struggling to
regain control of Medco Energi after losing a majority stake
amid the rippling aftershocks of the 1997 Asian financial
crisis. Today, their fortunes are brighter, even in the face of
sluggish domestic oil and gas production. In November, Hilmi
announced that all five of the wells Medco and its Canadian
partner had sunk into the Libyan desert had struck oil.
The companys strategy of looking for new sources overseas
is on target as the price of crude hovers between $90 and $100 a
barrel, says Jim Rogers, the New York investor who co-founded
the Quantum hedge fund with George Soros in the 1970s.
Six Siblings
“If you know the oil business, its a very wise thing to
do, he says. “Nobody has discovered a major elephant oil
field in over 40 years. Unless somebody discovers a lot of oil
very quickly in a very accessible area, the prices have got to
go a lot higher.
Financial moves are also under way. Medco plans to sell a
stake in an overseas unit later this year, which may bring in
$400 million. And in August, the Panigoros announced that Tokyo-
based Mitsubishi Corp. would pay $352 million for what amounts
to a 19.9 percent stake in Medco. The shares of Medco have
gained 94 percent since the end of 2004.
“If I wanted to jump farther and make a great leap, I
needed stronger muscles, Hilmi says of the capital the
Mitsubishi deal will produce.
Of the 11 Panigoro siblings, six help run Medco Group, of
which Medco Energi is the main subsidiary. In addition to
finding and pumping oil, Medco Energi, with a market valuation
of $1.44 billion, runs power stations and a methanol plant, and
its helping to build a geothermal plant.
Libyan Connection
Medco Group, which has 14,000 employees, also runs hotels
and a bank, makes instant noodles, produces palm oil and has
plans afoot for tree planting and pulp production in Papua,
Indonesias easternÂmost region.
Medco Energis total assets, which include proven reserves
of oil and gas, leapt 83 percent to $1.84 billion in 2006 from
about $1 billion in 2003, according to data compiled by
Bloomberg. Lately, though, domestic Indonesian oil output has
declined as mature wells give out, says Robert Adair, an analyst
at CIMB-GK Research Pte in Singapore. “So they need something
else, he says of Medco.
Enter Libya. The find, which Hilmi says may hold reserves
of as much as 1 billion barrels of crude, resulted from an
agreement Medco has with National Oil Corp., Libyas state-run
energy company, and Calgary-based Verenex Energy Inc. Medco and
Verenex will share 13.7 percent of any output. The rights to the
field were acquired at a 2005 auction.
Oman, Yemen
Environmental troubles have dented Medcos earnings. In
2006, an East Java gas well started spewing mud, inundating
schools and factories and displacing more than 13,000 families.
Medco sold its 32 percent stake last year and wrote off $61.7
million, contributing to a 49 percent decline in 2006 profit
from 05.
Adair, who rates the stock “outperform, says hes not
troubled by the outlook for the company. “The Libyan asset can
be quite good, he says.
Beyond Libya, Medco is exploring in Cambodia, Oman,
Tunisia, the U.S. Gulf of Mexico and Yemen and is in talks to
develop natural gas in Algeria. Its also hunting for capital.
The company plans to raise $100 million by selling stakes in its
Medco Global unit to private equity firms before a public share
offering later this year, according to Hilmi. In addition, Medco
is considering bids for its majority stake in PT Apexindo
Pratama Duta, an oil-drilling-services company.
“Banks are queuing to deal with the family, says Ati
Sugiharti, managing director at fund manager TAEL Management
Indonesia in Jakarta, who as an investment banker at UOB Asia
Ltd. helped the Panigoros make a comeback at Medco.
Cigars, Wine
The Mitsubishi agreement will contribute to Medcos plan
for pouring $1.4 billion into oil and gas development through
2010. The Japanese company — whose divisions include chemicals,
energy, food, machinery and metals — is taking its stake in
Medco through a new company, Encore Energy Pte, created with the
Panigoros. Mitsubishi, Medco and PT Pertamina, Indonesias
state-owned oil company, are in talks to build a plant on
Sulawesi Island to produce liquefied natural gas for the
Japanese market.
Medcos fortunes have let Arifin retreat from direct
involvement in company affairs. Sitting in the blue-carpeted
living room of his colonial-style estate on a tea plantation in
Maleber, an hours drive from his home in Jakarta, he says he
never imagined hed become a billionaire after starting out as a
door-to-door electrician.
Arifin is visiting Maleber on a November day to launch a
campaign to plant 250,000 trees, his way of returning some of
his wealth to the nation. After a buffet lunch, he puffs a Cuban
cigar and sips a glass of red wine, South African Spier Pinotage
2005, as he explains that the luxuries he and his siblings enjoy
are new to them. “I always say, Look, I started from scratch.
Please understand that, he says.
Coconut Palms
Arifin plays tennis at the corporate residence, which is in
central Jakarta and is reserved for Medco functions and family
gatherings. Its lawns are dotted with coconut palms. Inside,
paintings depict scenes from the city of Bandung, where the
Panigoros grew up. The house also showcases their passion for
music. In addition to the grand piano, it holds a set of drums,
a sound mixer and a dozen traditional Indonesian instruments
made of brass. In 2007, Brazilian jazz artist Sergio Mendes came
for a private concert.
Hilmi nearly embarked on a music career. At age 19, he won
second prize in a national classical guitar competition and a
scholarship to study in Italy. His music teacher advised him
that hed probably started too late to become a world-class
artist and should finish his engineering studies instead.
Thunderbird MBA
Hilmi took that advice and graduated from the Bandung
Institute of Technology in 1981. He then earned a masters
degree from the Colorado School of Mines in Golden, Colorado,
and spent a year in Glendale, Arizona, getting an MBA from
Thunderbird School of Global Management.
While some family-run enterprises in Europe can trace their
roots to the 19th century or earlier, ethnic-Indonesian
businesses have no such experience. Indonesia, now with a
population of 235 million spread over more than 17,000 islands,
is young. It declared independence from the Netherlands in 1945
after being occupied by Japan for much of World War II. The
nation has about 250 ethnic groups, and Islam is the dominant
religion.
Medcos growth is mirrored by Indonesias. The 370-member
Jakarta Composite Index has gained 161 percent since the end of
2004. Gross domestic product, which stood at $364 billion at the
end of 2006, is the largest in Southeast Asia. The government
says economic growth in 2008 will accelerate to 6.8 percent from
an estimated 6.3 percent in 07. The inflation rate was 6.6
percent in December, and the central bank has cut borrowing
costs 14 times since May 2006 to encourage companies to expand.
Dwindling Output
Domestic oil production is stumbling, and Medcos results
are no exception. Hilmi predicted last year that the companys
oil and gas production would be “flat in 2008.
A member of the Organization of Petroleum Exporting
Countries, Indonesia is Southeast Asias largest producer of
crude, yet its the third smallest of the 13 OPEC members. It is
trying to reverse a decade-long decline: In 2007, average output
fell to 960,000 barrels a day, 4 percent below the government-
established target of 1 million barrels, according to
Indonesias oil and gas regulator, BPMigas. Medco is fighting
that trend by raising cash to probe for additional domestic
sources while it invests abroad.
The Panigoro siblings climb to the highest rungs of
Indonesian business began in West Java. Their Muslim parents
were teachers who later became operators of a fabric shop in
Bandung. They encouraged their 10 boys and one daughter, Yani,
to read, study and play piano.
Bankrupt Store
The children experienced the strains of business when their
parents store, Toko Harapan, which means “shop of hope in
Indonesian, went bankrupt in the 1970s. The parents sold their
house, bought a smaller one and took out a loan to open a
printing business, says Yani, 56, who now runs Medco Groups
non-oil units and helps oversee Medco Energi.
“The experience taught us that earning money isnt easy,
she says.
Arifin says he was always more interested in business than
in his studies. He took 10 years to graduate from Bandung
Institute of Technology with an engineering degree. In 1972, a
year before he graduated, he started CV Corona Electric with a
couple of buddies. They worked from a scooter, installing
electrical equipment and selling repair and welding services.
When his father died in 1976, Arifin, the eldest, took charge of
the household and paid for his siblings educations.
Repairing Rigs
Arifin was doing repair work on drilling rigs for Pertamina
in the 1970s when he decided to seek out oil executive John
Sadrak Karamoy for some advice. Theyd met at a Jakarta driving
range. The Arab oil embargo had jolted prices: Crude surged from
$3 a barrel in 1972 to more than $12 a barrel by the end of 74.
Prices continued to rise through the 70s and surpassed $37 a
barrel in 1981.
Arifin asked Karamoy, then an executive with PT Stanvac
Indonesia, for his thoughts on the best way to break into the
oil business. “I told him, Drilling, Karamoy recalls. He
says he knew at the time that one of Stanvacs parents, Exxon
Corp., and other multinationals were planning to spin off their
drilling units and subcontract the work.
In 1980, Arifin took Karamoys advice, founding Meta Epsi
Pribumi Drilling Co., or Medco — the first Indonesian-owned oil
drilling contractor. Meta Epsi, meaning “electrical
engineering, was taken from the first company Arifin founded,
according to Hilmi. Pribumi means “indigenous Indonesian. Now
71, Karamoy served as CEO of Medco from 1998 to 2001 and
president commissioner — part of a group that oversees company
directors –until he retired in 2006.
Buying Assets
The price boom reversed, and oil fell as low as $11 a
barrel by 1986. Medco thrived in the 1990s by buying assets of
other companies. In 1992, it acquired exploration and production
contracts in East Kalimantan province, in the Indonesian part of
Borneo, from San Antonio-based Tesoro Corp. Two years later,
Medco went public on the Jakarta Stock Exchange, becoming the
first Indonesian oil and gas company to trade publicly. In 1995,
it acquired Stanvacs Indonesian unit from Mobil Corp. and
Exxon.
Medco bought Stanvac fields on the island of Sumatra for
$88 million, a premium of $32 million on the value Medco had
estimated. The price had been driven up in competitive bidding,
but Medco sensed the site had potential. The gamble paid off. To
break even, Medco needed 15 million barrels of new oil from the
fields. It found 200 million barrels, Karamoy says.
Buying Expertise
He says the acquisitions delivered expertise, too. “From
buying the Kalimantan fields, Medco got dedicated field
people, Karamoy says. “From buying Stanvac, it got a good
management team.
Hilmi had spent 15 years as a geologist and senior
executive at the Indonesian unit of Houston-based Vico Services
Ltd. (formerly Huffco). He joined Medco in 1997, the year the
regional financial crisis struck. Eventually, the upheaval would
tear Medco from the Panigoros grasp.
The epicenter of the Asian crisis was Thailand, where the
government abandoned the bahts peg to the U.S. dollar in July
1997 amid a widening current-account deficit. Bonds, stocks and
currencies across Asia tumbled, and economies in Indonesia,
Malaysia, South Korea and Thailand fell into recession. Malaysia
introduced capital controls in September 1998 and pegged the
ringgit to the U.S. dollar.
Indonesias economy contracted 13 percent that year, and
the rupiah lost more than 80 percent of its value against the
dollar. Unable to borrow, Indonesian companies cut production.
Some faced bankruptcy.
Harvard Case Study
Medcos sources of credit dried up. It tried to survive on
the cash — mostly in dollars — produced by its oil business,
according to a 2006 case study of the Panigoros financial
comeback produced by the Harvard Business School in Boston. The
distressed-debt unit of Credit Suisse First Boston, then a
division of Zurich-based Credit Suisse Group, began buying
Medcos debt. In 1999, Medco was forced to restructure.
“We had a default, and we were asking creditors for
rescheduling of debt — appealing and begging, Hilmi recalls.
Medco agreed to a proposal from CSFB that gave the bank a
majority stake in return for cancellation of $150 million in
debt and the refinancing of an additional $66 million. The
Panigoros were now minority shareholders.
Two years later, Credit Suisse would reap its reward. It
sold 34 percent of Medco to a unit of PTT Pcl, Thailands state-
controlled oil company. The price: $223 million, a 250 percent
return on investment. At the time, the Swiss bank retained 17
percent of Medcos shares.
Entering Politics
In Indonesia, the regional economic crisis also triggered
political turmoil. In 1998, a wave of protests and violence led
to the sudden resignation of Suharto, the dictator who had ruled
the nation for 32 years. Suharto died Jan. 27 at the age of 86.
Arifin, a former student activist and backer of pro-
democracy groups, resigned his Medco post as president
commissioner in 1998 to enter politics. He was elected to
Parliament and became head of a faction of Megawati
Soekarnoputris Indonesian Democratic Party of Struggle.
Megawati, the daughter of the nations first president, Sukarno,
served as Indonesias president from 2001 to 04.
Arifins roots in the business world would prove to be a
handicap. In 2001, the Indonesian attorney generals office
placed him under investigation for corruption over a 1996 loan
to Medco from a government investment corporation. Medco had
used the $65 million loan to acquire Dublin-based Dragon Oil
Plc; the president of the government corporation was named a
commissioner of Dragon Oil. Medco repaid the loan, plus
interest, in 2002, and the case against Arifin was dropped in
2004.
`A Liability
Arifin left politics the next year. “I have to admire
people who can do it all the time, he says.
Hilmi took charge as CEO in 2001. Today, he says he was
“very happy when Arifin left politics, removing potential
conflicts of interest. “When he was in politics, he had to put
a certain distance from the company because he was the majority
shareholder, Hilmi says. “It was a liability.
As the regional economy clawed its way back, Hilmi focused
on Medcos growth. In July 2004, the company completed a hostile
takeover of Sydney-based Novus Petroleum Ltd., which operated in
Australia, Indonesia, the Middle East and the U.S. About the
same time, CSFB and the exploration and production division of
Thailands PTT were fielding offers for their stakes in Medco.
On Oct. 14, 2004, they announced a preferred bidder, Temasek
Holdings Pte, Singapores state-owned investment company. That
day, Medco shares soared 17 percent.
`National Pride
One thing stood in Temaseks way: the Panigoros right to
match the offer and buy what amounted to 34 percent of Medco.
Three weeks later, Hilmi announced that the Panigoros would
fight Temasek. More was at stake than a cold business deal.
“The Panigoro family wants to retain national pride by buying
back Medco, Hilmi announced at the time.
“To me, business is not only money, he says, reflecting
on that pivotal decision today. “Business at a certain point
has to be a responsibility. Who will support the growth of a
country if not the private sector?
In the end, he and Arifin would need $478 million to pull
off the buyout deal. Cooperation from banks was scant. The
brothers turned to New York-based Merrill Lynch %26amp; Co. and UOB
Asia, the investment banking unit of Singapore-based United
Overseas Bank Ltd.
Roger Suyama, a Merrill Lynch managing director in Jakarta,
remembers the unusual call to his mobile phone on the last
Sunday of 2004 while he was vacationing in Seattle. Arifin and
Hilmi needed almost half a billion dollars, and their deadline
was six weeks away. Merrill and UOB recommended a leveraged
buyout followed by a secondary equity offering. “Arifin and
Hilmi made very fast decisions, Suyama recalls.
Loan, Share Sale
UOBs loan of $278 million was collateralized by the
Panigoros Medco shares, and Merrill provided $175 million via a
syndicate of lenders, plus $25 million in cash in exchange for
equity in Medco. The Panigoros would first borrow and then pay
off the loans within a few months by selling shares to the
public.
The two-stage approach represented both a challenge and an
opportunity for Suyama, an American-born banker of Japanese
descent who had recently rejoined Merrill after helping Hong
Kongs Richard Li take his telecommunications company, PCCW
Ltd., public in Japan. No private-sector company in Indonesia
had sold shares to the public since the start of the 1997
regional financial crisis.
`Gutsy Move
Raphael Amit, a management professor at the Wharton School
of the University of Pennsylvania in Philadelphia, says there
was no guarantee the equity offering would work. “That was a
fairly gutsy move, says Amit, 60, who collaborated with
Harvard finance professor Belen Villalonga to write the business
schools case study of innovative financing.
To build the syndicate, Suyamas colleague Soofian Zuberi,
then Singapore-based head of Merrills capital markets for
Southeast Asia, wooed unnamed hedge funds. “As a banker in the
emerging markets, you come across a lot of deals, but this was
the highlight of ones career, says Zuberi, now Merrills Hong
Kong-based co-head of equity capital markets for Asia. “There
was a combination of stress, excitement, innovation, a hostile
M%26amp;A situation, emerging-market risks and commodities. You
couldnt have more suspense.
For Merrill, the deals eventual success has proven to be a
boon, Suyama says. The structure was so profitable for the bank
and its clients that Merrill has done several similar
transactions in Asia. Its bankers call them collateralized
equity leveraged loan securities. Global hedge funds and wealthy
individuals in Hong Kong and the Middle East often participate,
he says.
`$5 Billion Company
Recent examples include a $279 million deal in 2006 in
which Indonesian businessman Rizal Risjad increased his stake in
mining company PT Berau Coal, based in East Kalimantan province,
to 90 percent from 9.3 percent.
Today, Hilmi says his goal for Medco is to more than double
its market valuation to $5 billion and reach net income of $500
million by the end of 2012, from $38 million at the end of 06.
“If I can deliver all the projects already in the pipeline
today on budget and on time, it will be a $5 billion company,
he says.
Once thats accomplished, Hilmi says, hell step down as
CEO and take up teaching geology and petroleum engineering at a
university. “Thats one way of giving back to society, he
says. Arifin already spends most of his time doing philanthropic
work through the Medco Foundation, which spends $2 million a
year on programs in education, health care, the environment,
disaster relief, reforestation and microfinancing.
Removing Debt
Who will guide Medco in the future? Its an open question.
Hilmi says hes grooming several managers, none of whom come
from the family — including siblings. “I dont consider Medco
as a family company, he says. “Whoever is qualified will be
the successor, with or without the Panigoro surname. At the
moment, we dont have any Panigoro in the pipeline.
“Its very dangerous for my son or Arifins son to have to
work in a company controlled by their fathers. Its not good for
them. Its not good for the company.
Under the Mitsubishi deal, the familys holding company
will own about 30.7 percent of Medco Energi. The Panigoros also
lifted a burden. “My brother and I, for the first time we
control the company with no debt at the family level, Hilmi
says. “That feels so good.
Hilmi says hes never regretted giving up a career as a
classical guitarist. He has a collection of seven of the worlds
finest guitars, including a Japanese Kohno, whose Professional-J
model lists in the U.S. for $6,999, and a flamenco guitar
selected for him by the Spanish guitarist Paco Peña. “Its a
passion, Hilmi says.
Hilmis business passion is now focused on shoring up
Medcos corps of petroleum engineers and geologists amid keen
competition for experienced employees, he says. Beyond top
talent, a knack for finding oil outside Indonesia may be
required for Medco to avoid hitting any wrong chords.
To contact the reporter on this story:
Yoolim Lee in Singapore at
