(Fitch Ratings - Hong Kong/Singapore - 05 May 2025)--Fitch Rating has assigned PT Medco Energi Internasional Tbk's (BB-/Stable) proposed senior notes a 'BB-' rating.
The proposed notes, to be issued by Medco's wholly owned subsidiary, Medco Cypress Tree Pte. Ltd., will be guaranteed by Medco and some of its key subsidiaries. The notes are rated at the same level as Medco's Issuer Default Rating (IDR), as they will constitute its direct, unsubordinated and unsecured obligations. Medco plans to use the proceeds to refinance part of its existing debt.
Medco's credit profile is characterised by an average production scale relative to 'BB' category upstream oil and gas (O&G) producers, a low-cost position and favorable earnings mix through fixed-price contracts. The Stable Outlook is supported by Medco's ability to generate free cash flow and maintain adequate liquidity.
Key Rating Drivers
Small Reserve Base: Medco's reserve base of 354 million barrels of oil equivalent (mmboe) at end-2024 are smaller than those of similarly rated peers. Fitch expects Medco's proven reserve (1P) life to remain adequate at about six to seven years over the next two years (2024: 7.5 years), based on additions from existing projects and investments in exploration and development.
Its Tanzania LNG project has potential to nearly double the company's 1P reserves over the next three to four years and extend reserve life. However, the timing of reserve accruals for this project depends on regulatory approvals.
Gas Contracts Underpin Stability: Medco's earnings are less sensitive to oil price changes as 60%-70% of its future production will be gas, with over half sold via long-term, fixed-price contracts with take-or-pay protections. This is in contrast to peers with high exposure to benchmark prices. The gas contracts mitigate price and volume risk.
About 35%-40% of Medco's O&G business EBITDA will be via fixed-price contracts. The EBITDA from fixed-price gas contracts is likely to remain at 1.3-1.5x consolidated interest expenses until 2028 (2024: 1.8x).
Concentration in Corridor Block: We expect Medco to produce about 145 thousand barrels of oil equivalent per day (mboepd) (2024: 152 mboepd), driven by its existing projects. Around 80% of Medco's total O&G production is from Indonesia. We expect its largest single block—the Corridor Block in Indonesia—to contribute about 30% of total volume on average over the next three to four years (2024: 38%). This risk is mitigated by the Corridor Block's lower cash cost of less than USD8/boe.
Rated on Consolidated Approach: Fitch rates Medco on a consolidated basis, including operations outside the restricted group (RG) as defined in its bond documents. Medco Power Indonesia (MPI) is outside the RG. Fitch sees there is high incentive for Medco to provide support to this leveraged wholly owned power business, which also shares a common brand.
Sufficient Rating Headroom: We expect Medco's consolidated EBITDA net leverage to increase to 2.8x during 2025-2028 (2024: 2.3x), mainly due to capex growth while EBITDA declines on lower oil prices. The lower EBITDA will be buffered by fixed-price gas contracts in its portfolio. Medco operates most of its projects, which gives it some flexibility to adjust operating and capital expenditure during periods of sharp price correction.
Debt-Funded M&A as Event Risk: Fitch expects Medco to continue to pursue acquisitions as part of its strategy to replenish reserves, in line with its long-term goal of maintaining its current scale. We see significant acquisitions funded by debt as event risk due to uncertainties regarding the timing and pricing of these transactions. Medco funded previous acquisitions with a combination of cash and debt.
Internal Cash Generation Supports Capex: On a consolidated level, we expect Medco to able to generate positive FCF over the medium term, in the absence of large new investments. Medco plans capex of around USD1.3 billion for the O&G business in 2025-2028, mostly for development projects and drilling at Oman Block 60, which will be funded through internal cash generation.
Leveraged Power Business: MPI had high EBITDA net leverage of around 10x at end-2024. The power business has been self-funded thus far, relying on domestic bonds and term loans to finance its projects. However, we expect MPI to require new financing to support on-going growth capex and initial investments for its Bulan solar power supply project, held by MPI's JV.
Potential Large Investments: Medco's LNG project in Tanzania and its JV's interest in Bulan (reported overall project cost of USD3 billion) are large and would increase capex substantially upon reaching their final investment decisions. Fitch thinks Medco's associate stake in PT Amman Mineral Internasional Tbk, which has current market valuation of about USD6 billion, provides substantial flexibility as Medco can monetise the stake to offset higher leverage arising from these investments.
Limited Information on Shareholder: Medco's majority shareholder, PT Medco Daya Abadi Lestari, is privately held by the Panigoro family with limited information publicly available. However, we believe the majority shareholder's access to Medco's cash is limited to shareholder returns, as Medco is listed with public shareholders. Material related-party transactions with the parent are also subject to disclosure requirements and approval from independent shareholders.
Peer Analysis
Medco has a greater share of fixed-price contracts than Canada's Vermilion Energy Inc. (BB-/Negative). Vermilion has broader geographic diversity, while Medco derives 80% of its volume from domestic assets. We expect Vermilion's scale to expand after its announced acquisition of Westbrick Energy Ltd, narrowing the gap with Medco. The Negative Outlook on its rating reflects its impaired liquidity profile and higher debt level.
Colombia's GeoPark Limited (B+/Stable) has a stronger financial profile, with EBITDA net leverage of around 1x, but its rating is constrained by its small size. Medco's production scale of 150 mboepd is about three times that of GeoPark's 35 mboepd-40 mboepd. The presence of fixed-price contracts also gives Medco higher earnings visibility. Medco and GeoPark share similar reserve lives of about seven years and benefit from low-cost positions.
Key Assumptions
-- Brent crude prices of USD65/barrel in 2025 - 2027 and USD60 in 2028
-- Gas prices in line with fixed-price contracts, where applicable
-- Total production volume of around 145 mboepd on average in 2025-2028
-- Average production and lifting costs between USD8.5-9.0/boe
- O&G capex averaging at around USD320 million a year and power capex averaging around USD80 million a year in 2025-2028,
-- Annual dividend payout at 25% of net income
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Sustained deterioration in 1P reserve base to below 300 million barrels
- Material decline in fixed-price gas contracts in Medco's EBITDA mix
- Consolidated EBITDA net leverage at above 3.3x
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Average daily production approaching 175 mboepd, while growing 1P reserve base to 500 million bbl and
- Consolidated EBITDA net leverage below 2.3x
- Better clarity on company's strategy for upcoming investments
Liquidity and Debt Structure
At end-2024, Medco's available cash of USD696 million is sufficient to cover its short-term debt of USD429 million. Fitch expects Medco to undertake refinancing for its existing borrowings. Medco actively manages its debt maturity profile and has a history of refinancing bond maturities well in advance through multiple tender offers and open market purchases. Medco's 20.92% stake in listed Amman provides additional financial flexibility to the company.
Issuer Profile
Medco is an Indonesian upstream O&G company, with some producing assets in Oman and Thailand. It produced 152 mboepd of O&G in 2024. Medco also holds a 20.92% investment stake in Amman.
Date of Relevant Committee
24 April 2025
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PT Medco Daya Abadi Lestari is privately held with limited information publicly available. However, we believe the majority shareholder's access to Medco's cash is limited to shareholder returns, as Medco is listed with public shareholders. Material related-party transactions with the parent are also subject to disclosure requirements and approval from independent shareholders. These factors allow us to rate Medco despite the lack of detailed information about the parent.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)
