Standard & Poor's: PT Medco Energi Internasional Upgraded To 'B+' On Improved Scale And Controlled Leverage; Outlook Stable

(SINGAPORE (S&P Global Ratings) Jan. 9, 2020)-- S&P Global Ratings today took the rating actions listed above. We raised the rating because we believe Medco's improved scale following the acquisition of Ophir will keep its capital expenditure to maintain production above 100 kboe/d at manageable levels. Medco's record of debt reduction will also contribute to the company's ratio of funds from operations (FFO) to debt sustaining above 12%.

Ophir adds scale and geographic diversity to Medco's operations.   The acquisition in May 2019 has increased Medco's production by 29%, with Ophir's production guidance for 2019 of 26 kboe/d. Medco's pro forma production in 2019 was about 110 kboe/d, with a balanced mix across liquids (43% of total) and gas (57%). Following the acquisition, Medco now has operations in Thailand and Vietnam, with overseas volumes accounting for close to a fourth of total production. In addition, there are synergies that the company estimates at about US$50 million on a full-year basis.

Capital expenditure to maintain production should be manageable.   We forecast Medco will invest about US$300 million per year in its oil and gas business over the next five years to maintain production above 100 kboe/d. This compares with the company's average annual EBITDA of US$850 million during the period. Medco's leverage should therefore be at least stable, if not decline, beyond 2020. The company has decent record in reserve replenishment, with a five-year average 2P (proved plus probable) reserves replacement ratio (RRR) of 1.1x in 2018. Based on the pro forma guidance of 110 kboe/d production in 2019, Medco has a 2P reserves life index of 8.1 years. The company's 1P (proved) reserves offer production visibility for 6.2 years based on reserves at end September 2019.

The company has a good record of debt reduction to preserve its creditworthiness.   Given Medco's thin financial headroom, we do not anticipate external growth in our base case. We expect the company to take necessary steps to curtail the leverage impact of any acquisition. Medco has a record of monetizing assets when necessary to control debt. Asset disposals in 2019 include the headquarters in Jakarta (raising US$163 million), a 8.81% stake in PT Amman Mineral Nusa Tenggara (AMNT; US$251 million), and stakes in some oil and gas fields (together about US$500 million). We see this ability and willingness to manage leverage as a key support for the 'B+' rating.

The stable outlook reflects our view that Medco will maintain its current production volumes and remain disciplined in its growth aspirations over the next 12-24 months, such that its leverage remains stable.

Downside scenario

We could lower the rating if Medco fails to replenish its reserves consistently, such that its volumes fall permanently well below 100 kboe/d. Further pressure on the rating would arise if the company's intrinsic creditworthiness erodes due to negative regulatory developments in Indonesia, falling hydrocarbon prices or large debt-funded investments with no marked contribution to earnings, such that the FFO/Debt ratio falls and remains below 12%.

Upside scenario

We see a higher rating as remote. It would require Medco to maintain its scale of operations comfortably above 100 kboe/d, with sustainable proven reserves well exceeding five years and a meaningful portion of fixed-price gas contracts that shield the company's from fluctuation in hydrocarbon prices. In parallel, we would expect Medco to reduce leverage, establishing a record of adequate funding and a FFO/Debt ratio above 25%.

Medco is an Indonesia-based and listed oil and gas company. Medco also owns PT Medco Power Indonesia and a 32% effective interest in AMNT, which controls the Batu Hijau copper and gold mine in eastern Indonesia. Medco has fourteen producing oil and gas fields in Indonesia, Thailand, and Vietnam, and a service contract field in Oman, with a total production of 110 kboe/d. Oil sales contracts are indexed to the Indonesian crude price index while the majority of the gas sales are contracted at a fixed price with annual escalation. The Panigoro family indirectly controls Medco through intermediate holding companies. (ends)