Standard & Poor's: EMP outlook revised to negative on fefinancing risk; rating affirmed at 'B'

(Singapore, August 24, 2015) -- Standard & Poor's Ratings Services today revised the rating outlook on Indonesia-based oil and gas exploration and production company PT Energi Mega Persada Tbk. (EMP) to negative from stable. At the same time, we affirmed our 'B' long-term corporate credit rating on EMP. In line with the outlook revision, we lowered our long-term ASEAN regional scale rating on EMP to 'axB+' from 'axBB-'.

The outlook revision reflects our view that EMP's refinancing risk will increase through 2016 as the company faces sizable debt repayments over the period. EMP's liquidity could fall to "weak," as defined in our criteria, over the next 12 months unless the company lengthens its overall debt maturity profile meaningfully.

We believe EMP's refinancing risk will remain elevated over the next 12 to 18 months. We estimate that the company has about US$130.9 million of short-term debt maturing over the next 12 months at the holding company. This compares with a cash balance of less than US$10 million at the holding company as of June 30, 2015. Operating cash flows and dividends from EMP's equity stakes in various producing blocks will be insufficient, in our view, to repay maturing debts and the company will need to refinance its debts. We understand EMP is seeking to refinance and discussing with banks to undertake resource-based lending using one of its major producing blocks. But this negotiation has not been finalized.

Although a successful debt refinancing by the end of 2015 would alleviate EMP's immediate liquidity risks, liquidity needs will stay high in 2016. Besides debt at the holding company level, EMP also has close to US$200 million of debt maturing in 2015 and 2016 at various company levels, including a subsidiary-level US$127.4 million syndicated loan outstanding associated with a stake in the Offshore North West Java (ONWJ) block the company acquired in December 2011. The block is producing, but dividends have not yet been made available to the parent EMP and therefore cannot repay any loans that are maturing at the EMP level. In addition, the ONWJ concession will expire in January 2017. We understand the company is seeking to extend the concession and maintain a stake in the block beyond 2017, which would lengthen the maturity of the syndicated loan by two years. Still, a meaningful delay in negotiating the extension with the government could complicate EMP's efforts to refinance this loan, triggering a further liquidity squeeze over the next 12 months.

EMP's balance sheet weakened significantly when it took on sizable costly (double-digit interest rate) short-term loans of about US$160 million in 2013 to refinance its equally costly borrowing for acquiring the ONWJ block and an exploration gas block in Mozambique. The company managed to extend the maturity of those short-term loans to December 2015 from the year before.

We affirmed the rating on EMP because we believe the company's small production profile and asset concentration will continue to constrain its business risk profile over the next 12 to 18 months. The company's ratio of consolidated funds from operations (FFO) to debt appears sound at 30%-35% in our base case. But EMP relies partly on dividends from its major income-producing assets, Kangean and ONWJ, to service its debts. Both blocks must service their own debts before upstreaming dividends to EMP, creating structural subordination. After accounting for both blocks using an equity method, we estimate that EMP's FFO interest coverage could average 2x-3x over the next 12 to 18 months, a level that is commensurate with our "aggressive" financial risk profile, as defined in our criteria.

The negative outlook on EMP reflects our view that the company faces growing refinancing risk associated with large short-term loans and a syndicated bank loan maturing by the end of 2016 if the ONWJ block concession is not extended.

We will lower the rating if we assess EMP's liquidity to have declined to "weak." This will occur if the company fails to refinance its maturing short-term debt with longer-dated borrowing at a reasonable cost or it faces a delay in extending the concession for the ONWJ block.

We may revise the outlook to stable if EMP lengthens its debt maturity profile meaningfully at a reasonable cost and extends the concession underlying the ONWJ block. The outlook revision would also be contingent on the company maintaining an FFO interest coverage comfortably above 2.0x under the equity-accounting method for the Kangean and ONWJ blocks. (ends)