Standard & Poor's: PT Saka Energi Rating Lowered To 'BB' On Uncertain Strategic Direction And Shrinking Production; Outlook Stable

(SINGAPORE (S&P Global Ratings) Jan. 9, 2020)--S&P Global Ratings today took the rating actions listed above. We lowered the rating because we believe that Saka's uncertain strategic direction is constraining investments and production, which, in turn, could undermine the company's cash flow adequacy. At the same time, we still see Saka as an important subsidiary of PT Perusahaan Gas Negara Persero Tbk (PGN).

Since PT Pertamina (Persero) acquired PGN in April 2018, we believe the group's strategic priorities for Saka have become less clear.   PGN's acquisition of some of Pertamina's gas assets in early 2019 suggests there could be a reorganization of industrial assets between PGN and its parent Pertamina. In March 2019, the State-Owned Enterprises Ministry's undersecretary for mining, strategic industries, and media affairs said that the Indonesian government, through PGN, was evaluating Saka's future direction. The options were to either sell Saka to Pertamina, or list it on the Indonesian stock exchange. We believe the uncertainty surrounding Saka's long-term ownership has undermined the company's ambitions. This is indicated by Saka's shrinking capital expenditure, and consequently, production levels, which should remain at 40 thousand barrels of oil equivalent per day (kboe/d) at best, compared with about 50 kboe/d each in 2017 and 2018. The scale of Saka's operations is smaller than that of peers.

PGN's support for Saka remains largely intact for the time being.  While upstream oil and gas may not be a strategic priority for PGN anymore, we believe the company remains committed to supporting Saka if necessary. We do not expect a swift change in organizational structure, owing to Saka's position as a material subsidiary to PGN, as well as the possibility of triggering a change-of-control clause in Saka's existing bonds. To that extent, the past repayments of the shareholder's loan have not fundamentally altered our view of group ties so far. We believe PGN could extend the instrument's maturity well beyond the due date of 2021, because we consider that Saka does not have sufficient financial resources to repay the instrument without raising debt. To that extent, we assume that PGN will take necessary actions so as not to burden its subsidiary's liquidity. A further reduction in the amount of shareholder's loan outstanding could be indicative of a dilution in ties between PGN and Saka.

Saka's limited financial resources restrict options.  In the absence of new debt raising, we believe Saka's acquisition firepower does not exceed US$200 million. In our view, Saka could buy producing assets that could add up to 10 kboe/d, i.e. 25% of today's production. We base our estimate on recent transactions in the region:

• PTT Exploration and Production Public Co. Ltd.'s acquisition of Murphy Oil Corp.'s Southeast Asian assets for about US$2.1 billion, adding 48 kboe/d;

• PT Medco Energi Internasional Tbk acquiring 25 kboe/d with Ophir Energy plc for US$0.6 billion.

Such a transaction would not meaningfully raise Saka's production profile in our view, and could use up most of its existing cash.

The stable outlook reflects our view that until the reorganization of Pertamina shows meaningful new developments, Saka will focus on its operations and achieve a production volume of about 40 kboe/d.

We could lower the rating on Saka if we downgrade PGN to 'BB' or there is a dilution of the relationship between Saka and PGN, including reduced operational integration, change in ownership or looser strategic oversight. Negative rating pressure would also escalate if Saka's ratio of funds from operations (FFO) to debt falls well below 12%, due to substantial organic cash burn, or to large debt-funded investments with no commensurate contribution to earnings. A continued decline in production could also erode Saka's intrinsic creditworthiness.

A higher rating would require Saka to increase significantly its scale of operations, with sustainable reserves providing clarity on production. At the same time, we would expect the company to maintain its sound profitability and a consistent capital structure, with FFO to debt comfortably above 12%. Alternatively, at current production levels, an FFO to debt well above 20% could pave the way for a higher rating. In addition, we would be looking at obtaining more clarity on Saka's long-term ownership.

PT Saka Energi Indonesia conducts hydrocarbon exploration and production in Indonesia. On June 30, 2019, Saka had proved and probable reserves of 99.1 million barrels of oil equivalent. The company holds working interests in 11 oil and gas blocks, six of which are producing. In the first half of 2019, Saka reported net production of 37.2 kboe/d. Saka is wholly owned by natural gas distribution and transmission company PGN. In turn, PGN is 56.9% owned by national oil company, Pertamina. (ends)