Release:Moody's affirms Medco B1 corporate family rating
Wednesday, May 10 2006 - 08:35 AM WIB
The rating affirmation follows Medco's announcement of its plan to issue US$177 million in convertible bonds (CB).
"Such additional debt financing is within Moody's expectations, while major performance measures would still fall within tolerance ranges for the current rating," says lead analyst Helen Li, adding, "Adj debt / proven and developed reserves would increase to around US$7/boe after consideration of the proposed convertible bonds."
The long-term senior unsecured rating remains one notch lower than the corporate family rating, reflecting structural subordination. The ratio of subsidiary debt to total debt will decrease slightly below 15% once the CB is issued. However, the B2 long-term rating reflects the likelihood that future borrowing will be raised at the operating subsidiary level, thereby increasing the risk of structural subordination.
The ratings continue to reflect Medco's strengths: 1) its ability to maintains its competitive cost position, although a rising trend is evident due to higher lifting and F&D costs, 2) its experience in Indonesia's operating environment and good track record, and 3) the stable outlook for the oil / gas industry over the next 12-18 months.
At the same time, the ratings reflect several challenges: 1) Medco's relatively short proved developed reserve life index, estimated at around 4-5 years at end-2005, 2) the continued natural decline expected in its production base over the next 2-3 years, although the Novus acquisition has moderately improved its production profile; 3) medium development risk and the associated large capex, which will result in negative free cash flows over the next 2-3 years and elevate leverage; 4) the uncertainty arising from its acquisitions strategy; and 5) the risk of financial demands from major shareholders.
Moody's says that the ratings could rise if 1) Medco's operating and financial profiles strengthen, with proved developed reserves life lengthening to more than 7 years, and 2) leverage - based on adjusted debt / proved developed reserves - ranges between US$4 and US$5 on a sustainable basis.
On the other hand, the ratings could experience downward pressure if 1) Medco's financial profile weakens as a result of an aggressive debt-funded acquisition and expansion strategy that leads to higher leverage, with adjusted debt / proved developed reserves exceeding US$8-9/boe, and 2) an its F&D costs increase to US$6-8/boe. In addition, negative rating pressure would also emerge if such a strategy is funded by short-term financing, which constrains the company's liquidity profile.
PT Medco Energi Internasional Tbk is predominantly an independent Indonesian E&P company with total proved reserves of approximately 173 million barrels of oil equivalent (BOE) and production of 30 million BOE in 2005. It also maintains oil service operations and a methanol plant in Indonesia. (end of release)