Moody's confirms EMP's B2 CFR; Outlook stable

(Singapore, March 18, 2016) -- Moody's Investors Service (Moody's) has today concluded the rating review of Energi Mega Persada Tbk (P.T.) (EMP) with the confirmation of its B2 corporate family rating. The rating outlook is stable. This action concludes the rating review for downgrade initiated on January 22, 2016.

Oil prices have dropped substantially reflecting continued oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line. Moody's lowered its oil price estimates on January 21 and expects a slow recovery for oil prices over the next several years.

The drop in oil prices and weak natural gas prices has caused a fundamental change in the energy industry, and its ability to generate cash flow has fallen substantially. Moody's believes this condition will persist for several years. As a result, Moody's is recalibrating the ratings of many energy companies to reflect this industry shift.

"The confirmation of EMP's B2 corporate family rating is supported by its increasing proportion of earnings and cash flows from stable gas producing blocks in Indonesia, underpinned by long-term sales contracts and solid local market fundamentals," says Brian Grieser a Moody's Vice President and Senior Analyst.

While the ratings also reflect EMP's solid credit metrics, the B2 CFR is constrained by the company's reliance on short term funding, relatively small scale, both in terms of revenue and reserves, and its dependence on a concentrated group of oil and gas producing blocks.

EMP's reliance on short term debt, and resultant weak liquidity profile, remains a key ratings consideration. Moody's anticipates that EMP will continue to successfully manage its short term debt by allocating free cash flow to debt reduction, refinancing maturities or potentially selling assets. EMP's reliance on short term debt has declined in 2016 with its execution of a new 5-year $60 million bank loan and subsequent repayment of high interest short term debt.

The stable outlook incorporates Moody's expectation that EMP will achieve its production growth targets within budget and to the planned time frames. Further, we expect weak earnings to continue in 2016 and that debt reduction will occur allowing the company to maintain low leverage and high interest coverage levels.

Ratings could come under downward rating pressure if oil prices are lower than Moody's current expectations or the company is unable to refinance or repay its near term debt maturities. Alternatively, if the company pursues a debt-financed growth strategy, the ratings could come under pressure.

Upward rating pressure is limited given EMP's scale and reliance on short term funding but may evolve if the company: 1) succeeds in implementing its expansion plans and ramping up its production, particularly at the Kangean block; 2) significantly reduces its reliance on short term funding; and 3) demonstrates consistent positive free cash flows.

The principal methodology used in this rating was Global Independent Exploration and Production Industry published in Decemebr 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

EMP is an independent oil & gas exploration and production company primarily located in Indonesia. EMP had an estimated total proved and probable reserves (2P) of 11.63 million barrels of oil and 138.9 million barrels of oil equivalent (mmboe) of gas. The company holds working interests in 12 oil and gas blocks, 8 of which are producing. In 2015, EMP reported average daily oil production of 11.2 thousand barrels per day (12.8 in 2014) and gas production of 35.8 thousand barrels of oil equivalent per day (37.7 in 2014). (ends)