Release: Moody's rates Medco Energi's debt

The following is a press release from Moody's Investors Service:

Hong Kong, February 08, 2005 -- Moody's Investors Service has upgraded the issuer rating of PT Medco Energi Internasional TBK (Medco) to B2 from B3. At the same time, the senior unsecured rating of notes issued by MEI Euro Finance Ltd (a wholly owned subsidiary of Medco) and guaranteed by Medco, has been upgraded to B2 from B3. The outlook on both ratings is stable.

Moody's says the upgrade reflects the fact that uncertainties over the Medco's acquisition of Novus and the risk associated with the financing of the transaction have been cleared. The said acquisition was completed on August 20, 2004 and was partially financed by a USD200 million bridge facility. This bridge facility was subsequently repaid of USD150 million, using the proceeds from the disposal of Novus' Australian assets and part of Indonesian assets to Santos for USD110 million, and one of its US assets, Stratton, to Apache for USD45 million. The maturity of the remaining USD50 million has been extended by 15 months until March 2006. Furthermore, it issued a 5-year rupiah bond of Rp1,350 billion in June 2004 to refinance the USD120 million in debt assumed from Novus. Moody's draws comfort that most of its indebtedness matures beyond 2007, which helps to reduce refinancing risks.

Medco's B2 rating also reflects 1) its competitive cost position, although it is on an increasing trend due to higher lifting costs, 2) its experience in Indonesia's operating environment, and 3) its moderate state of financial leverage in terms of Adjusted Debt to Proved Developed Reserves.

Medco's financial leverage - based on Adjusted Debt to Proved Developed Reserves of USD4.76 at end-2004 - compares favorably relative to exploration and production companies with similar ratings. However, based on proved developed reserves, it 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.

At the same time, the rating reflects 1) Medco's relatively short proved developed reserve life index, estimated to stand at 4.2 years at end-2004, 2) the uncertainty arising from its acquisitive strategy and the resultant associated capex, which will likely to be majority debt funded, 3) the continued natural decline expected in its production base over the next 2-3 years, although the successful Novus acquisition will moderately improve its production profile.

Furthermore, Medco has substantial capex plan which will not be sufficiently funded by its operating cash flow but need additional debt financing. Moody's expects Medco to raise appropriate long-term funding, but not short term funding, to meet these capex requirements, in order not to constrain its liquidity profile. Moody's also notes that Medoc's available source of funds include its cash on hands of approx. USD80 million and has no material debt maturing in the next 12 months. Potential sale of Novus assets (US and Middle East), planned to be materialised in the same period, will also help improve its liquidity position.

The B2 rating further reflects legal and structural subordination risks where more than 15% of total debts are on secured basis and at the subsidiary level.

Moody's notes that the Panigoro family has signed an agreement to acquire from PTT Exploration and Production Public Co. Ltd. (Baa1) and CSFB a total 59.9% stake in New Links Energy. When added to its existing 40.1% interest, the family will become the 100% owner of New Links Energy when the transaction is expected to be completed in February 2005. Consequently, Medco - in which New Links Energy holds 85.5% - will in turn become majority-owned by the Panigoro Family.

The change in ownership has raised potential concerns over the corporate governance. However, comfort can be drawn from the fact that 1) at Medco, the Board of Commissioners with a minimum 30% independent member, performs supervisory and advisory functions, and 2) related-party transactions with the Panigoro family are conducted at arm's length and amounted to less than 1% of trade accounts payable as of September 2004.

Moody's says that the rating could rise if Medco's operating and financial profiles strengthen, with proved developed reserves life lengthening to more than 7 years and leverage - based on Adjusted Debt/Proved Developed Reserves -- falling below USD4.00 on a sustainable basis.

On the other hand, the rating 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 the Adjusted Debt/Proved Developed Reserves ratio exceeding USD5.00 or 2) if such strategy is funded by short term financing which further constrain the company's liquidity profile.

PT Medco Energi Internasional Tbk (Medco) is predominantly an independent Indonesian E&P company with total proved reserves of approximately 188 million barrels of oil equivalent (BOE) and production of 36 million BOE in 2004. The company also maintains oil service operations and a methanol plant in Indonesia. (end of release)