Moody's assigns (P)B2 to Energi Mega Persada
Friday, October 19 2012 - 06:40 AM WIB
Moody's has also assigned a provisional (P)B2 rating with a stable outlook to the proposed USD notes to be issued by EMP International Holdings Pte. Ltd. The notes are unconditionally guaranteed by EMP and some of its subsidiaries.
The company will use the proceeds from the notes to refinance some of its existing debt and fund working capital.
The provisional status of the ratings will be removed upon the completion of the bond issue and a satisfactory review of the final documents.
If the transaction is not completed or if the amount of the bond issue differs materially from Moody's expectations, then the ratings will be pressured in view of the tight liquidity profile and the current breach of a financial covenant of one of the company's major financing facilities.
"The (P)B2 rating is supported by EMP's increasing proportion of relatively stable gas revenues, underpinned by medium- to long-term take-or-pay contracts, and its plan to further ramp up gas production," says Simon Wong, a Moody's Vice President and Senior Analyst.
Moody's expects the proportion of gas revenues to increase to 40% in 2012 from 20% in 2011 and range between 50% and 60% in the medium term.
EMP's production and the size of its proved developed reserves as of mid-2012 were more than double the levels in 2010, as a result of the acquisition of ONWJ PSC, offshore North West Java, and the commercial operation of the Terang gas field (Kangean block located in East Java).
It continues to benefit from a low production cost base, given the onshore nature of most of its producing blocks. It reported proved developed reserves of 73.5 million barrels of oil equivalent (mmboe) and daily production volume of 29.7 thousand barrels of oil equivalent per day (mboepd) as at 30 June.
"However, these strengths are tempered by EMP's history of high financial leverage. The company's plans to lower its leverage are subject to the continued ramp up of production, including in its Kangean and Bentu blocks," says Wong, also the Lead Analyst for EMP.
"EMP also has limited financial flexibility to fund the development of large oil & gas fields and is highly reliant on its partners for funding," he adds.
The acquisition of ONWJ was wholly debt-funded, while the development of the Terang gas field (Kangean block) was fully funded by EMP's partners: Mitsubishi Corporation (A1 stable) and Japan Petroleum Exploration Co. Ltd (Japex, A2 stable). EMP's RCF/debt was 12.9%, and the ratio of total debt to proved developed reserves was USD12.2/boe at end-2011.
Moody's expects debt to proved developed reserves to remain between 11x and 12x in the medium term, and which will strain its current rating. EMP also has a history of delays in the commercialization of its reserves. For instance, the Kangean development was delayed by almost four years.
"Moody's is also concerned about the high proportion of undeveloped proved reserves of 74%, as this indicates that despite its good long-term growth prospects, EMP will have to invest a substantial amount of capex to develop these reserves," Wong adds.
EMP aims to spend USD700 million between 2012 and 2014 to ramp up its production and commercialize its gas reserves and which will limit its ability to generate free cash flow.
Furthermore, EMP has high production concentration risk -- with ONWJ and Kangean accounting for 70% of its revenues in the medium term -- even though it has strong partners, such as Pertamina (Baa3 stable), Mitsubishi and Japex which operate these blocks.
EMP's liquidity profile is not adequate. It has been in breach of a financial covenant in a major borrowing facility since 2008, although this situation should improve materially with refinancing from the issuance of the proposed bonds.
The stable outlook incorporates Moody's expectation that EMP will achieve its production growth within its budget and the planned time frame, while reducing leverage such that its RCF/debt exceeds 25% in 2013.
Upward rating pressure is limited, but may evolve if the company: 1) succeeds in implementing its expansion plans and ramping up its production, with a consistent track record of production at the Kangean and Bentu blocks; and 2) demonstrates consistent positive free cash flow and successfully lowers leverage.
Financial indicators that Moody's would consider for an upgrade are: adjusted debt/proved developed reserves of less than USD9/boe or RCF/debt of more than 30% to 35% on a sustained basis.
The ratings will be under pressure if EMP fails to lower its leverage and achieve its production targets within the projected costs and time frame. Cyclical movements in oil and gas prices or aggressive debt-funded acquisitions will also pressure the rating.
Adjusted debt/proved developed reserves of more than USD12/boe or RCF/debt of less than 20% on a consistent basis would be indicative of downward pressure on the rating.
The principal methodology used in rating PT Energi Mega Persada Tbk (EMP) was the Global Independent Exploration and Production Industry published in December 2011.
EMP is an independent oil & gas exploration and production company and was established in 2001. It had total proved reserves of approximately 286.2 mmboe. It holds working interests in twelve blocks.
As at 30 June, approximately 92.8% of its proved reserves consisted of natural gas. Listed on the Indonesia Stock Exchange, EMP is 8.01%-directly-owned by PT Bakrie and Brothers Tbk (BNBR). However, the Bakrie family has significant influence on EMP through additional shares owned in their personal capacity and through corporate affiliates of BNBR. (ends)