Moody's affirms Medco's B1 rating and assigns B1 rating to its proposed bonds; outlook negative

(Singapore, November 01, 2021) -- Moody's Investors Service has affirmed the B1 corporate family rating (CFR) of Medco Energi Internasional Tbk (P.T.) (Medco).

Moody's has also affirmed the B1 ratings on the backed senior unsecured bonds issued by Medco Platinum Road Pte. Ltd., Medco Oak Tree Pte. Ltd. and Medco Bell Pte. Ltd. These bonds are unconditionally and irrevocably guaranteed by Medco.

At the same time, Moody's Investors Service has assigned a B1 rating to the proposed USD-denominated backed senior unsecured notes to be issued by Medco Laurel Tree Pte. Ltd., a wholly-owned subsidiary of Medco. The proposed notes will be irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries.

The bond proceeds will be initially kept in an escrow account and will ultimately be used either to refinance existing indebtedness or to fund acquisition or investments. The notes will be used to repay existing indebtedness at Medco's restricted group if Medco does not enter into an acquisition agreement prior to 30 September 2022.

The rating outlook is negative.

"The rating affirmation reflects our expectation that supportive oil and gas prices will drive an improvement in Medco's credit metrics toward levels appropriate for its B1 rating," says Hui Ting Sim, a Moody's Analyst.

"The negative rating outlook reflects the uncertainty associated with Medco's growth plans and consequently the potential that its credit metrics will deteriorate further than our expectation over the next 12-18 months," adds Sim.

RATINGS RATIONALE

Moody's estimates that the company's debt/EBITDA and adjusted retained cash flow (RCF)/debt will be at 3.5x-4.0x and 10%-15%, respectively, over the next 12-18 months if the proposed bond is used for refinancing and based on Moody's medium-term Brent crude price assumption of $50-$70 per barrel. Moody's calculates Medco's metrics by excluding Medco Power and netting off Medco's cash in escrow earmarked for debt repayment from its debt calculations. Moody's forecasts Medco's production will increase to slightly above 100 thousand barrels of oil equivalent per day (kboepd) in 2022 from 94 kboepd in the first half of 2021 as demand for gas improves and the company increases capital spending.

But the proposed bond by Medco could also be used to fund acquisitions or investments, though the company's plans are unclear at this stage. A debt-funded acquisition could weaken the company's credit metrics beyond its downgrade thresholds. Moody's will assess the implications of Medco's investments on its financial and business profile when there is more clarity on its acquisition targets.

While the proposed bond is indicative of Medco's acquisition growth appetite, it also demonstrates the company's proactive liquidity management. The company has a track record of refinancing its debt maturities well in advance, increasing the average weighted maturity profile of its debt.

Medco has very good liquidity over the next 12-18 months. As of 30 June 2021, there were unrestricted cash and cash equivalents of $253 million, cash in escrow for debt and interest repayment of $116 million and undrawn credit facilities of close to $500 million at Medco excluding Medco Power. Moody's expects the company's cash holdings, cash flow from operations of around $370 million and asset divestment of around $100 million to be sufficient to address its debt maturities of around $180 million and spending of close to $300 million over the next 18 months.

Medco's B1 rating reflects its sizeable production scale and reserves, high revenue visibility from its fixed-price gas sales agreements and very good liquidity.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Medco has a highly negative exposure to environmental risk primarily because of its high exposure to carbon transition risk, physical climate risk and natural capital risk. Upstream companies are facing stronger pressure over time as decarbonization efforts and the transition towards cleaner energy continues. But Medco's risk exposure is partially tempered by the high proportion of gas in its production mix at around 60%. The company has a sizeable power arm with renewable operations that are not within the restricted group of its US dollar bonds. However, at present, most of Medco's earnings are still generated through its oil and gas operations, reflecting its elevated exposure to environmental risk.

Medco has a highly negative exposure to social risk, because of high responsible production risks inherent to the nature of upstream operations and the need to develop relationships with local communities. Medco's supply chain is also exposed to a degree of regulatory unpredictability, as demonstrated by the evolving policies on the pricing of natural gas sold to certain sectors within Indonesia.

In terms of governance factors, the ratings consider Medco's growth appetite, as shown by its history of debt-funded acquisitions, complex organizational structure and concentrated ownership. But this is balanced by the company's track record of proactive financial management to refinance debt maturities in advance and increase the average weighted maturity profile of its debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of Medco's rating is unlikely over the next 12-18 months, given the negative outlook.

A change in outlook to stable from negative will require greater clarity on its growth plans, a sustained improvement in its credit metrics and very good liquidity. Specific credit metrics that could support the outlook returning to stable include adjusted net debt/EBITDA below 4.0x, adjusted RCF/net debt above 10%, and adjusted EBITDA/interest expense above 3.5x.

Downward pressure on Medco's rating could build if the company's credit metrics remain weak for its rating level or its liquidity deteriorates. Debt-funded acquisitions could also exert downward pressure on the company's rating.

Quantitative metrics indicative of downward pressure include adjusted net debt/EBITDA rising above 4.0x, adjusted RCF/adjusted net debt falling below 10%, or adjusted EBITDA/interest expense falling below 3.5x.

The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) is a Southeast Asian integrated energy and natural resource company listed in Indonesia with three key business segments, oil and gas, power and mining. (ends)