S&P: PT Saka Energi Rating Lowered To 'B+' On Weaker Expected Support From PGN; Outlook Stable

(SINGAPORE (S&P Global Ratings) June 2, 2020)--S&P Global Ratings today took the rating actions listed above.

PGN's increasing focus on transmission and distribution signals a lower strategic importance of Saka Energi to the group. The strategic fit of Saka Energi within parent PGN has been slowly reducing over the past two years. PGN's operating focus has shifted increasingly toward gas transmission and distribution, following its amalgamation into PT Pertamina (Persero) and the acquisition of a 51% stake in gas transmission company PT Pertamina Gas. The gradual shift away from a strategy of backward integration to upstream exploration and production operations has accelerated over the past 18 months. We expect Saka Energi to produce about 35 thousand barrels of oil equivalent per day (kboe/d) in 2020, nearly one-third less than in 2018. At the same time, we expect Saka Energi's contribution to PGN's EBITDA to reduce to 20%-25% depending on hydrocarbon prices, compared with 35%-40% in earlier years.

In our view, the sharp reduction in capital spending on replenishing the reserve base at Saka Energi also signals reduced commitment by PGN to maintain upstream integration. With yearly capital spending of about US$150 million over the past three years, Saka Energi has been unable to stabilize its reserve base, which fell to about 96 million barrels of oil equivalent (boe) as of Sept. 30, 2019, compared with about 131 million boe in 2017. Saka Energi's capital spending is likely to reduce to US$100 million-US$150 million in 2020, so reserve depletion is likely to remain. The depleting asset base further questions Saka Energi's longer-term strategic fit within the group.

In our view, recent communication from PGN on providing support to its subsidiaries and limited progress on the extension of the shareholder loan signal reducing extraordinary support to Saka Energi. The expectation that PGN would be willing and able to provide sufficient timely extraordinary financial support to Saka Energi underpinned our earlier assessment of a three-notch uplift to Saka Energi's SACP. Yet, PGN recently indicated that a potentially substantial reduction in consolidated revenue and gross margin at the group may restrict its ability to provide support to its existing subsidiaries or affiliates. This follows the Indonesian government's decree issued in April 2020 to cap industrial gas prices at US$6 per million British thermal units (mmBtu) for seven industrial sectors. So beyond our view that Saka Energi's strategic importance to PGN has reduced and despite the cross-default clause that remains between PGN's U.S. dollar bonds and debt at material subsidiaries, we regard this statement as a signal that extraordinary parent support may not be forthcoming to the extent we earlier considered. We now consider a one-notch uplift to Saka Energi's SACP, compared with a three-notch uplift previously.

We also note that PGN has not yet made a decision on the extension of the maturity on the remaining shareholder loans extended to Saka Energi--US$155 million maturing in 2021 and US$283 million in 2022.

We believe PGN's ability to extend support to Saka Energi has eroded in light of unfavorable government regulations. Recent credit-negative developments in Indonesia's gas transmission and distribution sector have reduced, in our view, the quality and predictability of PGN's earnings. These developments are the latest in a sector that has been subject to increasingly negative political intervention. This, in turn, has eroded PGN's ability to provide sufficient extraordinary support for its subsidiaries. The government has capped the company's gas selling price while its sourcing price is still being renegotiated. There is no existing mechanism to reduce its sourcing price or receive compensation for the revenue loss. We expect PGN to generate EBITDA of US$850 million–US$1,050 million across 2020–2022, as opposed to our expectation in January 2020 for EBITDA to stay above US$1 billion over the same period. We lowered our assessment of PGN's SACP to 'bb' from 'bb+' to reflect the pressure on the company's cash flow from gas margins compression due to negative government intervention and weak demand.

Based on our projections, Saka Energi's stand-alone cash flow adequacy will dip in 2020 but hold steady in 2021. Saka Energi's cash flow adequacy ratios are likely to dip in 2020 due to lower production and hydrocarbon prices. We estimate the ratio of funds from operations (FFO) to debt to be about 6% in 2020, assuming EBITDA of US$130 million-US$150 million and a production of 35-40 kboe/d. We forecast EBITDA to recover to US$200 million-US$250 million in 2021, under our oil price assumptions. This will translate into an FFO-to-debt ratio of 12%-15% in 2021. These levels are commensurate with our expectations for the 'b' SACP on the company.

Saka Energi's liquidity buffer will erode in 2020, amid tax liabilities and weaker operating cash flows. The company's liquidity buffer of US$351 million as of Dec. 31, 2019, will abate following the payment of a one-off tax liability of US$128 million and potential related tax penalty of US$128 million. That's despite a capital spending reduction in 2020 to US$100 million-US$150 million. We project cash balance to reduce to about US$50 million at the end of 2020. We estimate Saka Energi's cash balance to stay above US$100 million through 2021. Free operating cash flow in 2021 is likely to be marginally positive, under the higher price assumptions underpinning our hydrocarbon price deck.