RELEASE: Moody's downgrades Medco ratings; outlook remains negative
Wednesday, March 4 2009 - 11:57 PM WIB
These rating actions complete the rating review for possible downgrade initiated on 3 November, 2008, following the loss of revenue and cash flows from an expiration of a Technical Assistance Contract with PT Pertamina.
"The rating downgrade principally reflects Medco's reduced production base, high expenditure necessary to sustain production levels, and weakening operating cost profile," says Kathleen Lee, a Moody's VP/Senior Analyst and lead analyst for the company.
"While Medco's B2 rating takes into account its competitive cost position and extensive experience in Indonesia's E&P operating environment, it also acknowledges a lack of committed long-term bank funding to fund both its upcoming debt maturities (amounting to over US$290 million) and capital expenditure (estimated to cost approximately S$300-350 million) over the next 12 months," says Lee.
Moody's also notes that Medco had cash reserves of US$340 million as at end-December 2008 (from its disposal of PT Apexindo and Tuban in 4Q2008).
However, the rating agency expects Medco to engage in an intense drilling program to maintain production which is expected to result in negative cash flows in 2009 due to sharply depressed energy prices. This will result in debt outpacing reserve and production growth, which will in turn further weaken the company's leverage profile.
"The downgrade in ratings also factors in Moody's concerns about Medco's ability to sustain its earnings and cash flow generation in the medium-term, given the declining productivity of its mature oil fields and continuing high production levels. This amounts to 24 million barrels of oil equivalent ("mmboe") per annum, which is among the highest of its B-rated exploration and production (E&P) peers. In addition, the company has failed to make any material progress in monetising its gas assets," says Lee.
"In addition, its recent overseas expansion entails higher business risks given the company's inexperience in these new markets," she adds.
Moody's also believes that weak credit markets will continue to hamper Medco from developing, expanding, resuscitating and/or re-balancing its asset portfolio, which requires significant capital expenditure.
Meanwhile, alternative liquidity plans, consisting of an asset divestment program, are likely to first undergo prolonged negotiations due to difficult market conditions.
An upgrade in the ratings is unlikely given the negative outlook.
However, Medco's ratings could be lowered if 1) quarterly production trends were to falter; 2) it is unable to secure funding for its sustenance and expansion/downstream capital expenditures; 3) proceeds from the disposal of Apexindo and Tuban assets were not applied to its May/July debt reduction; 4) its reinvestment parameters weaken (as evidenced by 3-year F&D cost rising above $20/boe); 5) its financial profile weakens (as evidenced by Adjusted Debt/Proved Developed Reserves rising above $11/boe); 6) there are revisions to profit sharing schemes in its existing contracts; and/or 7) it fails to obtain extensions to its Block A and Bawean PSC contracts prior to their respective expiries in 2011.
The previous rating action was taken on November 3, 2008, when Medco's corporate family and unsecured debt ratings were placed on review for possible downgrade.
Headquartered in Jakarta, Medco is a predominantly oil & gas E&P company with additional operations in drilling, downstream oil & gas activities and power generation. Through its acquisition of Novus Petroleum of Australia in 2004, Medco gained a platform to expand overseas, to the US, Middle East (including Libya, Tunisia, Oman and Yemen) and Cambodia.
Its international assets, which are mostly at exploration stages, remain small and accounted for just 3% of proved reserves and 2% of annual production in 31 December, 2007. Its annual production capacity is approximately 18.4 mmboe and 46.4 million cubic feet ("mmcf") of gas.
The company reported sales of US$1,313 million for the twelve months ending September 30, 2008.(end of edited release)