Release: Moody's changes Medco Energi B1/B2 outlook
Tuesday, August 15 2006 - 05:03 AM WIB
The ratings affected by the outlook change are:
* B1 local currency corporate family rating -- Medco
* B2 foreign currency long-term rating - MEI Euro Finance Ltd (guaranteed by Medco)
"The change in outlook follows the recent incident surrounding the Banjar Panji well in the Brantas PSC on the Indonesian Island of Java, and which has resulted in significant water and mud flows," says Terry Fanous, a Moody's Senior Vice President. The well - whose mud flows have inundated several villages - is operated by Lapindo Brantas Inc and the PSC is 32% owned by Medco.
"The change in outlook to negative reflects the uncertainty surrounding the remediation process and the potential financial liability, if any, that Medco will bear from such a material event," Fanous adds.
Over the next few months, Moody's will monitor 1) the progress and costs associated with remediation efforts, 2) the potential impact, if any, of these costs on Medco's liquidity position over the next 12-15 months, 3) amount and timing of any insurance recovery, and 4) the consequent financial profile, including Medco's plan to manage its capital expenditure requirement over the next 1-2 years.
The ratings continue to reflect Medco's 1) ability to maintains its competitive cost position, although a rising trend is evident due to higher lifting and F&D costs, and 2) experience in Indonesia's operating environment and solid track record. At the same time, the ratings reflect several challenges, including 1) Medco's relatively short proved developed reserve life index, 2) the continued natural decline expected in its production base over the next 2-3 years, 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; and 4) uncertainty arising from its acquisitions strategy.
The ratings could be lowered if the potential liability arising from the Brantas incident 1) materially raises liquidity risk such that cash sources are insufficient to meet all cash calls over the next 12-15 months, or 2) leads to a weakening in Medco's financial profile, particularly if it coincides with an aggressive debt-funded acquisition and expansion strategy that results in higher leverage, with adjusted debt / proved developed reserves exceeding US$8-9/boe and its F&D costs increase to US$6-8/boe.
The ratings outlook could revert to stable when the potential liability is clarified and considered by Moody's to be manageable within Medco's liquidity and financial profiles.
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)