Release: S&P affirms B+ rating on Medco Energi
Thursday, September 15 2005 - 04:37 AM WIB
"The rating on Medco continues to be constrained by the cyclical nature of the industry, its short proved reserves life, large capital expenditure requirements, concentration risks, and the company's very aggressive financial policy," said Standard & Poor's credit analyst Royston Quek. "However, these weaknesses are partially offset by the company's favorable cost structure, and some degree of insulation from currency instability and sovereign debt risk."
Medco is a publicly listed oil and gas exploration and production company in Indonesia, with revenue of US$545 million in 2004, and total assets of US$1.5 billion as at Dec. 31, 2004. It had gross proved reserves of 160 million barrels of oil equivalent as at Jan. 1, 2005.
Medco is exposed to volatility in the prices of crude oil, condensate, and natural gas. Moreover, the company's proved reserves life is short at about six years, and oil production has been declining due to its rapidly maturing fields. It needs to incur large capital costs for its sizable undeveloped proved and probable reserves to become commercially exploitable.
Growth in production and proved reserves will depend on securing new gas sale agreements, which in turn hinges on the development of Indonesia's gas infrastructure. Although Medco's large portfolio of exploration blocks offers good growth opportunities, it also exposes the company to high execution and operation risks.
The rating is also limited by the concentration of Medco's oil production and proved reserves in a single block. The Rimau block in South Sumatra accounts for 63% of the company's oil production and 40% of total proved reserves.
Medco's financial profile should weaken as the company assumed new debts to fund acquisitions and capital expenditures. Over the next three years, total debt to capital is likely to be about 55%, compared with 52% at June 30, 2005, while EBITDA interest coverage ratio could fall to 6x from 8x in the first half of 2005. Nevertheless, Medco's liquidity is expected to remain strong in the near to medium term due to the expectations for high oil prices. At June 30, 2005, it had cash of US$162 million.
The rating on Medco is supported by the company's favorable cost structure. Although the company's lifting costs and finding and development costs have been increasing over the past few years, they remain favorable compared with Medco's peers. Medco also benefits from some insulation from instability in the Indonesian rupiah, as most of its revenue and costs are based in U.S. dollars. In addition, the Indonesian government has not imposed a debt moratorium or interfered with local entities accessing foreign exchange markets to service foreign currency obligations in recent years.
"The stable outlook is based on the expectations that demand for oil will remain strong, that the retained Novus assets will be successfully integrated into the group, and that adequate liquidity is maintained despite the company's large capital requirements." said Mr. Quek. (end of release)
Source: Standard & Poor's Ratings Services