Release: S&P revises outlook on Medco Energi to negative

(SINGAPORE May 9, 2006)Standard & Poor's Ratings Services said today it revised its outlook on Indonesia's PT Medco Energi Internasional Tbk. (Medco) to negative from stable. Standard & Poor's also affirmed its 'B+' corporate credit rating on Medco, an Indonesia-based oil and gas exploration and production company.

At the same time, Standard & Poor's assigned its 'B+' issue rating to the proposed five-year senior unsecured convertible bonds of up to US$170 million to be issued by Medco CB Finance B.V., a special purpose financing vehicle wholly owned by Medco. The rating on the proposed issue reflects the corporate credit rating on Medco, as the issue will be fully guaranteed by Medco, and will constitute the direct, unsubordinated, unconditional, and unsecured obligations of the issuer and Medco.

The outlook revision reflects Medco's increased debt burden after the proposed convertible bond issue. The company's financial profile is likely to remain highly leveraged in the medium term, given its significant capital expenditure program totaling US$1.5 billion over the next three years.

"Based on our financial projections, the proposed issue would be insufficient to cover Medco's planned capital investments, and the company is likely to require another US$400 million to US$600 million in additional borrowings over the next two to three years," said Standard & Poor's credit analyst Royston Quek.

Apart from a deteriorating financial profile, Medco's business profile has also weakened over the past year because of its maturing fields. This has resulted in lower production levels and higher lifting costs. The company's proved reserve life index is short at 6.7 years as at Dec. 31, 2005, and gross oil and gas production fell to an average of 82,700 barrels of oil equivalent per day (boe/d) in 2005, from 90,300 boe/d in 2004.

Medco's substantial capital expenditures would be used to increase its oil and gas production. Nevertheless, Standard & Poor's believes that a substantially higher level of production may not be achieved because of Indonesia's weak infrastructure, which continues to reduce the company's opportunities in securing new gas sales supply agreements. Without such agreements, Medco would be unlikely to raise its proved reserves. Consequently, the company's sales and cash flow generating ability may not improve as planned.

The rating on Medco could be revised downwards if the company's financial profile continues to deteriorate, for example if debt to EBITDA increases to above 4x, or the ratio of funds from operations to total debt falls below 15%. A weakening business profile, such as falling reserves or production, could also lead to downward pressure on the rating. Conversely, the outlook on the company could be revised to stable if it is able to secure long-term gas sales supply agreements to certify its probable gas reserves as proved reserves, and if the company uses the improved cash flows to reduce borrowings.(end of release)