Release: Moody's confirms Medco Energi's B3 ratings; outlook positive
Tuesday, June 15 2004 - 12:12 PM WIB
Moody's says its decision to confirm the B3 rating reflects the moderate 10% increase in production at Medco over the next 2-3 years in view of the proposed acquisition. This level of production increase is below what we previously anticipated and follows Medco's decision to sell part of Novus' assets in Indonesia as well as its interest in the Australian Cooper Basin to Santos Ltd (rated P-2) for a consideration of US$110m (plus contingent considerations capped at US$3.5m). Moody's notes that the Novus acquisition will only partially address the production decline which Medco has been facing.
Moody's notes that the acquisition will cost Medco around US$250m, assuming 100% acceptance of its offer, plus up to US$120m for Novus' existing debt. Medco intends to fund these transactions with its existing cash reserves plus a combination of bank bridging finance and proceeds from a planned local currency bond.
Medco intends to refinance the bridging finance from available liquid reserves, including the Santos' cash proceeds (the transaction with Santos is subject to certain conditions, including the outcome of the Medco offer to Novus.)
As at June 11, 2004, Medco had obtained acceptances relative to 59% of outstanding Novus shares.
The positive outlook reflects the potential for an upward rating trend if Medco finalizes its financing plan, and demonstrates prudence in pursuing its growth strategy. Furthermore, Moody's expects Medco to maintain adequate liquidity -- upon the completion of a successful debt financing plan -- supported by the US$110m that would be received from Santos.
Medco's B3 senior unsecured rating reflects its competitive cost position, its experience in Indonesia's operating environment, its moderate state of financial leverage, and its association with PTT Exploration and Production Public Co Ltd (PTTEP; rated Baa1), which indirectly owns 34% of the company. At the same time, the rating reflects Medco's relatively (short) proved developed reserve life index, the uncertainty arising from its acquisition strategy, the continued natural decline expected in its production base over the next 2-3 years, and its capital expenditure program over the medium term for the development of its gas reserves.
Medco's pro-forma financial leverage -- based on Adjusted Debt to Proved Developed Reserves -- compares favorably relative to E&Ps with similar ratings. However, based on proved developed reserves, Medco has a relatively short reserve life, although over time, its proved developed reserves are expected to increase if it successfully commercializes its large undeveloped gas reserves.
The rating could go up if 1) the Novus acquisition is completed as anticipated 2) Medco executes its acquisition debt financing as planned, and 3) it maintains its financial leverage -- based on Adjusted Debt/Proved Developed Reserves -- in the US$3.5-US$4.50 range.
On the other hand, the rating could experience downward pressure if 1) Medco's short-term debt financing exercise proves unsuccessful, and 2) it continues pursuing large debt-funded acquisitions, leading to an Adjusted Debt/Proved Developed Reserves ratio above US$4.5-US$5.00.
PT Medco Energi Internasional Tbk (Medco) is predominantly an independent Indonesian E&P company with total proved reserves of approximately 155 million barrels of oil equivalent (BOE) and production of 33 million BOE in 2003. The company also maintains oil service operations and a methanol plant in Indonesia. (end of release)
Sydney: Brian Cahill, Managing Director, Corporate Finance
Terry Fanous, VP - Senior Credit Officer, Corporate Finance
Moody's Investors Service Pty Ltd 612 9270 8100