Fitch Revises Saka Energi's Outlook to Stable, Affirms Ratings at 'B+'

(Fitch Ratings - Singapore - 05 Apr 2023)-- Fitch Ratings has revised PT Saka Energi Indonesia's Outlook to Stable from Negative and affirmed the Long-Term Issuer Default Rating at 'B+'. The agency has also affirmed Saka's senior unsecured US dollar bonds at 'B+' with a Recovery Rating of 'RR4'.

The Outlook revision reflects Saka's improved business profile as its reserves increased in 2022 beyond our previous expectations. Saka's proved reserve life rose to 6.2 years by end-2022 from 4.8 years in 2021. Fitch believes the risks of a decline in Saka's operating profile in the near-to-medium term has been reduced with the adequate reserves. We expect parent PT Perusahaan Gas Negara Tbk (PGN, BBB-/Stable) to help Saka repay or refinance its US dollar notes due 2024.

Saka's ratings benefit from a two-notch uplift from its Standalone Credit Profile (SCP) of 'b-', based on our assessment of PGN's 'Medium' incentive to provide support, in line with our Parent and Subsidiary Linkage Rating Criteria. The 'b-' SCP reflects the constraints of the small size of its operations.

Key Rating Drivers

Small Scale Despite Improvement: Saka's operating profile has improved with higher proved reserves of 75.6 million barrels of oil equivalent (mmboe) as of December 2022 (2021: 50.6mmboe) and proven and probable reserves of 114mmboe (2021: 87.2mmboe). Saka added 37.2mmboe to its proved reserves against production of 12.2mmboe during 2022 (2021 production: 10.6mmboe).

However, reserves and production are still at the lower end of 'B' rated peers. We estimate proved reserve life remained at 6.2 years at end-2022, based on production volume of 12.2mmboe in 2022. We expect production to range between 11mmboe and 13mmboe per year over the next three years. In the absence of inorganic growth, Saka is likely to face challenges in maintaining its reserve profile on a sustained basis over the medium term.

Low Leverage: We expect Saka's leverage, defined by net debt/EBITDA, will improve to 0.5x in 2023, from an estimated 0.7x in 2022 (2021: 2.7x), due to high oil prices and lower debt. We expect net leverage to remain low at 0.6x by 2024 even as we forecast lower oil prices, as Saka's strong cash flows during 2022 and 2023 will help reduce debt materially. We forecast Saka's net debt to decline to USD172 million by 2024 (2022: USD328 million; 2021: USD698 million).

Parental Support for Bond Repayment: We expect Saka to require PGN's support to repay its US dollar notes when they mature in 2024. We estimate Saka's EBITDA will fall to USD330 million in 2023 (2022: USD456 million) based on our oil price assumptions. We forecast Saka will need around USD100 million to repay its US dollar notes in 2024, considering its capex plans. Fitch expects PGN to support Saka's funding requirements although the exact nature of the support is currently uncertain.

PGN has included Saka as a co-borrower in a debt facility for up to USD50 million in 2023, reflecting its support commitment. Saka's earnings derive some stability from its large share of earnings from long-term fixed-price gas contracts. We include USD283 million in shareholder loans in Saka's debt.

'Medium' Legal, Operational Incentive: We believe Saka is a material subsidiary, as defined in the bond documentation of PGN's USD950 million notes. A default by Saka would trigger a cross-default provision in PGN's bonds, which mature after Saka's USD376 million notes due 2024. However, we believe PGN has only 'Medium' legal incentive to support Saka, as its bond documents are vague in the definition of a material subsidiary, giving PGN some discretion. PGN's control over Saka's board and management drive our 'Medium' operational incentive assessment.

Saka Misalinged in Group Structure: PGN has explicitly expressed its intention to provide liquidity support to Saka, but the subsidiary's position in PGN's structure remains uncertain after a restructuring of state-owned oil and gas companies that transferred the state's 57% ownership of PGN to PT Pertamina (Persero) (BBB/Stable). There has been no clarity from PGN or Pertamina on Saka's position to date, resulting in our 'Weak' assessment of the strategic support incentive.

Derivation Summary

Saka's 'b-' SCP is comparable with that of other small independent rated oil and gas companies globally. The ratings of Gran Tierra Energy International Holdings Ltd. (GTE, B/Stable) and Frontera Energy Corporation (B/Stable) are constrained to the 'B' category due to the inherent operational risks from their small scale and the low diversification of their oil and gas production profiles.

Saka's low production of 33 million of barrels of oil equivalent per day (mboepd) is similar to that of 'B' rated peers. We expect Saka's production to average around 33mboepd, which is on a par with GTE's forecast production of 32mboepd and lower than Frontera's production of 42mboepd. GTE and Frontera have proved reserve lives of 6.8 years and 8.6 years, respectively, higher than Saka's 6.2 years. Saka is likely to face greater challenges in maintaining its reserve profile on a sustained basis, which explains the difference in their standalone assessments.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Oil (Brent) price of USD85/barrel (bbl) in 2023, USD75/bbl in 2024, USD65/bbl in 2025 and USD53/bbl thereafter in line with Fitch's oil and gas price assumptions.

- Natural gas sales prices based on contracted Indonesian production prices for the next three years; Henry hub price of USD3.5/thousand cubic feet (mcf) in 2023 and 2024, USD3.0/mcf in 2025 and USD2.75/mcf thereafter.

- Oil and gas production of 31mboepd in 2023, 33mboepd in 2024, 37mboepd in 2025 and 40mboepd in 2026 (2021: 29mboepd, 2022 estimate: 33mboepd)

- Capex of around USD150 million in 2023, USD250 million in 2024, USD165 million in 2025 and USD220 million in 2026 (2021: USD106 million, 2022 estimate: USD67 million)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Strengthening of linkages with PGN upon clarity of Saka's position within the group structure;

- Sustained improvement in reserve life while maintaining production levels.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Weakening of linkages with PGN in the absence of significant additional support and a deterioration in Saka's position within the group structure;

- Weakening of Saka's SCP, including, but not limited to, declining reserves or production in the absence of reserve acquisitions, or a weakening of its liquidity position.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Support from Parent Required: Saka will require support from PGN to repay its USD376 million in bonds due May 2024 and also roll over shareholder loans of USD142 million due December 2024. Saka has another shareholder loan of USD142 million due December 2025, which we expect to be rolled over.

Issuer Profile

Saka, a wholly owned subsidiary of PGN, engages in oil and gas exploration and production and acts as PGN's upstream arm.

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.

Public Ratings with Credit Linkage to other ratings

Saka's ratings benefit from a two-notch uplift from its SCP based on our assessment of moderate linkages with the parent.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.