S&P: Medco outlook revised to stable from negative on better liquidity; 'B' rating affirmed

(SINGAPORE, May 22, 2012) -- Standard & Poor's Ratings Services said today that it had revised the outlook on Indonesia-based oil and gas exploration and production company PT Medco Energi Internasional Tbk. to stable from negative. At the same time, we affirmed the 'B' long-term corporate credit rating on the company. In line with the outlook revision, we raised the ASEAN scale rating on Medco to 'axBB-' from 'axB+'.

"We revised the outlook to stable to reflect Medco's lower reliance on debt to fund future growth," said Standard & Poor's credit analyst Andrew Wong. "Higher oil prices and asset sales have increased the company's liquidity and internal sources of cash. We, therefore, expect Medco's debt-to-EBITDA ratio to remain at about 4.0x in 2012 and 2013, in line with our expectation for the rating."

The stable outlook reflects our expectation that Medco's production and development projects will continue to progress as planned, and that oil prices will remain above US$90 a barrel and gas prices at about US$4.0 per million British thermal unit.

"We affirmed the rating to reflect Medco's exposure to volatile hydrocarbon prices, the company's large investment requirements, and its aggressive financial policy that relies on debt to fund growth," said Mr. Wong. Medco's favorable location and cost structure, the good growth potential in its development and exploration blocks, and its partial insulation from currency instability and sovereign debt risk temper these weaknesses.

Medco's liquidity and operating cash flow have improved due to higher oil prices. Medco has "adequate" liquidity, as our criteria define the term. We expect the company's sources of liquidity, including cash and available credit facilities, to exceed its uses of liquidity by at least 1.4x in the next 12 months. We anticipate that the company's liquidity sources will exceed its needs even if EBITDA declines by 15%. Asset sales have also contributed to the improvement in liquidity.

We expect Medco's financial risk profile to remain "aggressive", despite the improvement in liquidity. This is due to the company's substantial estimated total capital expenditure of $695 million in 2012 and 2013. The spending relates to Medco's major development projects, namely the Senoro-Toili gas/liquefied natural gas development and the Block A gas reserves project in Indonesia.

Progress at Medco's major projects is critical to prevent any deterioration in the company's "weak" business risk profile from the continuing decline in its producing asset, namely the Rimau block. While the growth potential in Medco's major projects is solid, these projects expose the company to some execution and operational risks. These projects, however, are currently proceeding as planned.

We may lower the rating if Medco's liquidity or financial risk profile weakens due to: (1) delays at the company's major projects, resulting in higher-than-expected capital expenditure or a delay in cash flow contributions; (2) lower-than-expected production in existing fields; or (3) a substantial fall in oil prices. The debt-to-EBITDA ratio rising to more than 4.5x on a sustained basis would indicate such a weakening. (ends)