Moody's confirms Saka Energi's B2 ratings, changes outlook to negative

(Singapore, April 07, 2021) -- Moody's Investors Service has confirmed the corporate family rating and senior unsecured rating of Saka Energi Indonesia (P.T.) at B2.

The rating outlook has been changed to negative from ratings under review.

Today's rating action concludes the review for downgrade, which was initiated on 7 January 2021.

"The confirmation of Saka's B2 rating is based on our assessment that the imminent risk to Saka's liquidity has been partially mitigated by its plan to seek judicial review of its $127.7 million tax dispute," says Hui Ting Sim, a Moody's analyst. "At the same time, we now expect free cash flows at Saka over the next 12 months will be higher than our previous forecast because of improved oil prices, lower capital spending and certain tax refunds," add Sim.

"The negative outlook reflects potential deterioration of Saka's liquidity over the next six to nine months if the outcome of the judicial review of tax penalty is not in favor of the company or if Saka fails to get an extension of its $361 million shareholder loan maturing in January 2022," adds Sim.

RATINGS RATIONALE

Saka faces a potential tax penalty liability of $127.7 million relating to its purchase of a 65% stake in Pangkah block from Hess Corporation (Ba1 stable) in 2014. While the company is currently preparing its application to seek judicial review, it will take some time for its appeal to be filed with the Supreme Court in Indonesia (Baa2 stable). Saka does not expect to receive a tax invoice over this period. An unexpected acceleration of this tax penalty liability will put downward pressure on the rating.

While Saka's parent, Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable), has extended the maturity of shareholder loans in the past, the partial repayment of shareholder loan in January 2021 has increased uncertainty with respect to further extensions. Further repayment of its $361 million shareholder loan due January 2022 will be credit negative.

Saka's liquidity will be good with cash holdings above $150 million in 2022 if the company is not required to service the potential tax penalty or repay its shareholder loan. Saka expects to receive a refund of $39.8 million from the tax office in 2021, following a favorable verdict by the Supreme Court in December 2020 for another tax dispute involving Saka Pangkah LLC.

Moody's estimates Saka will produce around 23-27 thousand barrels of oil equivalents (kboepd) over the next two years and maintain capital spending at around $80 million per year. Moody's forecasts are based on its medium-term Brent crude oil price assumption of $45-$65 per barrel.

The one-notch uplift from parental support incorporated in Saka's B2 ratings takes into account (1) the cross-default clauses between PGN and Saka, and (2) the reputational and funding risks to PGN and its ultimate shareholder, Pertamina (Persero) (P.T.) (Baa2 stable), should Saka default.

ESG CONSIDERATIONS

Saka's ratings consider the very high environmental risk it faces through its oil and gas operations. Specifically, oil and gas exploration and production companies such as Saka are exposed to very high carbon transition risk. However, this risk is mitigated by the very high proportion of natural gas in Saka's production mix, which accounts for about 83% of total production.

Saka is also exposed to social risks, especially in terms of responsible production and health and safety issues. However, this risk is mitigated by the company's long track record of operating its businesses without any major incidents.

In terms of governance considerations, the rating incorporates Saka's concentrated 100% ownership by PGN and its status as a private company. Despite being unlisted, Saka publishes quarterly financial statements and maintains a reasonable degree of transparency of its operating performance.

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

Given the negative outlook, a rating upgrade is unlikely.

Nonetheless, the rating outlook could be revised to stable if (1) there are positive developments and clarity on Saka's strategic role within the consolidated Pertamina/PGN group; (2) there is clear financial support from PGN including equity injections and conversion of shareholder loans to equity that significantly improves Saka's liquidity position, and (3) Saka improves its operating profile without further straining its credit metrics.

Saka's ratings could be downgraded if Moody's lowers its assessment of parental support incorporated in the ratings. This could be driven by (1) a material change in Saka's ownership structure; or (2) Saka's importance to PGN deteriorates such that it does not qualify as a material subsidiary under the terms and conditions of the unsecured notes due in 2024 issued by PGN.

In addition, Moody's would downgrade Saka's ratings if (1) it does not secure an extension of the remainder of the shareholder loan due in January 2022, (2) its financial profile is materially hurt by amendments to the terms of the shareholder loans; (3) Saka partially repays the outstanding shareholder loan, materially straining its liquidity; or (4) the outcome of judicial review of the tax penalty is not in favor of the company and it is required to pay the tax penalty.

The ratings could also be downgraded if Saka's standalone credit profile deteriorates because of weak liquidity or if the company's reserves and production continue to decline.

Credit metrics indicative of a downgrade include adjusted retained cash flow/debt falling below 10% or adjusted EBITDA/interest falling below 2.5x.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Saka Energi Indonesia (P.T.) is an independent oil and gas exploration and production company in Indonesia. The company holds working interests in 11 oil and gas blocks, six of which are producing. In the first nine months of 2020, Saka reported net production of 25.7 kbpoed per day.

Saka is wholly owned by natural gas distribution and transmission company, Perusahaan Gas Negara (P.T.) (PGN). In turn, PGN is 56.96% owned by Indonesia's 100% state-owned national oil company, Pertamina (Persero) (P.T.).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.  (Ends)