Standard & Poor's: EMP downgraded to 'B-' On persisting refinancing risk; outlook negative

(Feb. 23, 2016)--Standard & Poor's Ratings Services said today that it had lowered its long-term corporate credit rating on Indonesia-based oil and gas producer PT Energi Mega Persada Tbk. (EMP) to 'B-' from 'B'. The outlook is negative. At the same time, we also lowered our long-term ASEAN regional scale rating on EMP to 'axB-' from 'axB+'.

"We lowered the rating because PT Energi Mega continues to face refinancing risks because of its sizable short-term debt at the holding company level," said Standard & Poor's credit analyst Yuehao Wu. "We anticipate that EMP's cash and internal accruals will be insufficient for the debt servicing and the company will rely on rolling over its short-term debt."

We estimate that EMP has about US$86 million in short-term debt maturing over the next 12 months at the holding company. This compares with our estimate that the holding company has a cash balance of less than US$10 million as of Sept. 30, 2015. In December 2015, EMP refinanced about US$53 million of high-cost debt at its Bentu gas block with a lower cost US$60 million bank loan maturing in December 2020. The company's operating cash flows and dividends from equity stakes in various oil and gas producing blocks, which we estimate at US$25 million-US$30 million for the next 12 months, will be insufficient to repay the remaining short-term debt without current maturities being rolled over.

We note that EMP has managed to roll over maturing debts several times over the past 18 months, in particular its high-cost loan from PST Finance Ltd. Nevertheless, we are unsure whether the company will remain able to do so in tougher market conditions.

The current poor industry and pricing conditions for hydrocarbons narrow EMP's refinancing options, in our view. Asset disposals could alleviate refinancing risk on maturing debts. Still, we believe this process could be lengthy and the proceeds uncertain, especially for non-producing blocks that have additional capital spending requirements. Refinancing short-term maturities with longer term loans could also be difficult at a reasonable cost over the next six to 12 months, given the reduced investor appetite for oil and gas exposure. We believe refinancing though resource-based lending will also have more stringent covenants attached. Moreover, we estimate that blocks contributing more than 85% of EMP's production are already encumbered. This leaves limited scope for meaningful additional secured debt.

"The government extension of EMP's concession on its Offshore North West Java block is positive from a liquidity standpoint because it postpones the maturity of a collateralized loan on the block to December 2020," said Ms. Wu.

Nevertheless, EMP's effective interest in the block decreased to 12.2% from 18.7%. This reduction in interest will narrow the company's asset base, reserve profile, and increase its dependency on its other assets. The company acquired the block in 2011 and its concession was to originally mature in 2017. EMP's other producing blocks will also likely require growing capital spending to maintain or increase production over the next two years, most notably at the Kangean block.

The negative outlook on EMP reflects our view that the company's refinancing risk will persist over the next 12 months.

We could lower the rating if EMP faces difficulty in refinancing or rolling over its maturing short-term debts over the next six months.

We may revise the outlook to stable if EMP addresses its refinancing risk, resulting in a lengthened debt maturity profile at a reasonable cost. An outlook revision also depends upon the company maintaining funds from operations cash interest coverage well above 1.5x based on the equity-accounting method. (ends)