Press Release: S&P affirms Medco rating; outlook stable

Following is a press release from Standard & Poor's:

SINGAPORE (Standard & Poor's) July 29, 2004:Standard & Poor's Ratings Services today affirmed its 'B+' corporate credit rating on Indonesia's PT Medco Energi Internasional Tbk (Medco). The outlook is stable.

"The rating on Medco is constrained by its short proved reserves life, large capital expenditure requirements, concentration risks, and the company's very aggressive financial policy," said Standard & Poor's credit analyst Ee-Lin Tan, associate director in the Corporate & Infrastructure Ratings Group.

"Nevertheless, these weaknesses are somewhat offset by Medco's favorable cost structure, and some degree of insulation from currency instability and sovereign debt risks."

Medco is an oil and gas exploration and production company of modest size, with total revenue in 2003 of US$463 million, and assets of US$979 million at Dec. 31, 2003. Proved petroleum reserves totaled 139 million barrels of oil equivalent (boe) at Jan. 1, 2004.

The company's proved reserves life is short at four to five years, and production is declining due to the rapid maturity of its fields. Efforts to acquire domestic assets in the past two years to replenish reserves and support production have not produced material results.

Growth in production and proved reserves will depend partly on the materialization of gas sales contracts, which in turn hinges on the development of Indonesia's gas infrastructure to absorb Medco's large uncommitted gas reserves.

At the same time, its large portfolio of exploration blocks provides good growth opportunities, but exposes it to high operating risks. Nevertheless, Medco's recent acquisition of Australia's Novus Petroleum Ltd., an upstream entity, alleviates production pressure on Medco's existing assets to some extent and boosts its reserves life modestly to about six years.

The rating is also limited by the concentration of Medco's proved reserves and oil production in a single block. The Rimau block in South Sumatra accounts for 70%-80% of the company's oil production and about 70% of its proved reserves.

Medco's credit measures should weaken with lower production levels and the issuance of new debt to fund its intensive drilling program and acquisitions, including Novus. Cash flows are also sensitive to a decline in oil prices. Over the near to medium term, total debt to capital is likely to be in the region of 60%, compared with 39% at Dec. 31, 2003, while EBITDA interest cover could be about 5x, compared with 10x in 2003.

Medco's favorable cost structure supports the rating on the company. Its lifting cost at US$4.14/boe in 2003, although higher than its US$2.89/boe in 2002, compares favorably with the industry average of US$5-US$6/boe. Nevertheless, Medco's lifting cost could rise, as production declines. Medco benefits from some insulation from instability in the Indonesian rupiah, as most of its revenues are based in U.S. dollars.

Furthermore, despite its difficulties, the Indonesian government in recent years has not imposed a debt moratorium or interfered with local entities accessing foreign exchange markets to service foreign currency obligations.

Medco has a US$200 million bridging loan that is due in December 2004, which was taken up to fund the Novus acquisition, although US$100 million in net proceeds from the upcoming sale of Novus' assets in Australia and Indonesia to Santos Ltd. (BBB+/Stable/A-2) will be channeled to repay the loan. The sale of Novus' other assets, such as those in the Middle East and U.S., is also being considered. As such, refinancing risk should not be significant, and liquidity is expected to be adequate to strong, given Medco's high cash balance after the acquisition.

"The stable outlook is based on expectations that the sale of certain Novus' assets takes place as planned, that Novus will be successfully integrated into the group, and that adequate liquidity is maintained despite Medco's large capital requirements," said Ms. Tan.

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com.

All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. (*)