Moody's downgrades Saka Energi to B1; changes outlook to negative

(Singapore, April 30, 2020) -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Saka Energi Indonesia (P.T.) to B1 from Ba2. At the same time, Moody's has downgraded the rating on its senior unsecured notes to B1 from Ba2.

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

Today's rating action concludes the review for downgrade, which was initiated on 31 January 2020.

RATINGS RATIONALE

"The downgrade reflects our view that Saka's strategic importance to its parent, Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable), and its operating profile have both diminished," says Vikas Halan, a Moody's Senior Vice President.

PGN's announcement in February 2020[1] of its plan to restructure and streamline its subsidiaries in order to focus on midstream and downstream businesses has reinforced Moody's view that Saka's importance to PGN has declined.

Saka's upstream operations had previously served as a source of feedstock security for PGN's gas pipelines, and was a key driver behind PGN's vertical integration strategy. Since the completion of the reorganization in 2018, where the Government of Indonesia (Baa2 stable) transferred its ownership in PGN to Pertamina (Persero) (P.T.) (Baa2 stable), Saka's strategic importance to PGN has been diminishing. This is because Pertamina's extensive gas production in Indonesia can serve as feedstock for PGN's gas pipelines, thereby displacing Saka.

Nonetheless, the two-notch uplift incorporated in Saka's B1 ratings reflect Moody's expectations of extraordinary support from PGN in an event of distress. Moody's assessment of parental support takes into account (1) reputational and other funding risks to PGN should Saka default; and (2) PGN's extensive involvement in the financial and operational management of Saka.

On 15 April 2020, Saka paid $127.7 million to the tax authorities following the Indonesian Supreme Court's decision in January 2020 to hold Saka liable for taxes of $127.7 million. Another $127.7 million of tax penalty that Saka has to pay is currently under discussion with the tax authorities. The tax liability relates to the purchase of a 65% stake in Pangkah block by Saka from Hess Corporation (Ba1 stable) in 2014.

"Saka's payment to the tax authorities will weaken its liquidity position amid a challenging price environment, and will constrain the investments needed for Saka to stem a deterioration in its operating profile," adds Vikas, who is also Moody's Lead Analyst for Saka.

Without inorganic growth through acquisitions, Moody's expects Saka's reserve life will remain below five years. Its capital spending of $150-$200 million in 2020 will only allow the company to focus on maintaining existing operations in oil and gas fields. Saka's production levels will continue to decline to 30-31 thousand barrels of oil equivalent per day (kboepd) in 2020 from 51.5 kboepd in 2017. While Saka will benefit from an increase in its working interest in Muriah gas block to 100% from 20% in 2020, Moody's expects production from the gas block will yield less than 1.5 kboepd given the operational challenges at the field.

As such, Saka's credit metrics will remain weak over the next 12-18 months, with adjusted retained cash flow (RCF)/debt at 8%-10% and adjusted EBITDA/interest around 4x-5x. Moody's projections incorporate the assumptions that Saka will (1) pay the full tax liability in 2020 using internal cash as it continues to pursue legal avenues to contest the ruling, and (2) secure an extension from PGN on the maturity of its shareholder loan due in January 2021.

Further, Moody's assumes that Indonesia's price cap on downstream gas selling price at $6 per million british thermal units will not materially affect Saka's earnings and cash flows. This is based on Moody's expectation that Saka would receive compensation from the government for the shortfall in margins, although there is regulatory uncertainty on the mechanism and process of reimbursement. (ends)