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Rating Action:

Moody's assigns (P)B2 ratings to Medco Energi; outlook stable

28 Jul 2017

Singapore, July 28, 2017 -- Moody's Investors Service has assigned a provisional (P)B2 corporate family rating (CFR) to Medco Energi Internasional Tbk (P.T.) (Medco).

At the same time, Moody's has also assigned a provisional (P)B2 rating to the proposed USD-denominated backed senior unsecured bonds to be issued by Medco Strait Services Pte. Ltd., a wholly-owned subsidiary of Medco. The proposed bonds are irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries.

The ratings are provisional and dependent on the successful completion of the proposed bond issuance. The proceeds will be used for the repayment of debt maturing over the next 12 months and will improve the company's liquidity profile.

The outlook on the ratings is stable.

RATINGS RATIONALE

"The ratings reflect Medco's modest, but improving scale of production and reserves of oil & natural gas, which are in various stages of production and development. The ratings also reflect a modest degree of visibility on the company's cash flow from sales agreements for natural gas at fixed prices, and which will account for 25-30% of its total production volumes over the next 2-3 years," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

Medco has six producing blocks in Indonesia and had an average daily production volume of 57.7 thousand barrels of oil equivalent per day (mboepd), excluding service contracts, in 2016. The company is in the process of developing its Block A asset in Aceh, as well increasing production from its recently acquired Block B asset in the South Natuna Sea. Production, excluding service contracts, has already increased to 82.6 mboepd in Q1 2017.

Gas accounted for about 62% of Medco's sales in 2016 and the proportion will likely remain at similar levels over the next 2-3 years. All the company's natural gas sales are under long-term contracts and about half are under fixed-price contracts, which provide high visibility on revenue and some resilience to oil-price declines.

"At the same time, the ratings are constrained by Medco's high leverage, which has increased over the last two years as the company has invested about $1.2 billion, principally in Indonesian mining, and oil & gas assets," says Halan, who is the lead analyst for Medco at Moody's.

Medco's adjusted debt/EBITDA was 6.8x, retained cash flow (RCF)/adjusted debt was 7%, and EBITDA/interest was 2.7x for 2016. These credit metrics are weak for its ratings. Credit metrics improved in Q1 2017 with increase in production. Adjusted debt/ EBITDA improved to 5.2x, RCF/ adjusted debt improved to 8.6% and EBITDA/ interest improved to 3.2x for the twelve months ended March 2017.

The company expects to improve its credit metrics over the next 12 to 18 months via a) selling some of its non-core assets, including the Energy Building in Jakarta and its coal mining assets for about $500 million, b) a rights issue for its equity shares to generate $150 million, and c) an IPO of its copper and gold mining business that should provide sufficient funds for repayment of the $246 million in shareholder loans that Medco has provided.

"The company's deleveraging plan will reduce its leverage significantly. However, the execution of the plan remains exposed to market conditions and regulatory approval, which can cause delays in timing and a reduction in valuations," says Halan.

"Nonetheless, the ratings incorporate our expectations that Medco will remain committed to its deleveraging plan and will not increase its borrowings further. We expect that it will be successful, at least partially, on executing this plan, such that its credit metrics will improve over the next 12--18 months with adjusted debt/EBITDA falling below 5.5x, RCF/adjusted debt of at least 10%, and EBITDA/interest of at least 3x," says Halan.

Moody's notes that Medco's power business, Medco Power Indonesia (P.T.) (MPI, 49% owned, unrated) and mining business, Amman Mineral Investama (P.T.) (AMI, effectively 41.1% owned, unrated), are not part of the restricted group, and that they will continue to operate as independent entities with no financial support from, or recourse to, Medco over and above the committed equity injections.

Further, Moody's has assumed these businesses will not pay any meaningful dividends over the next 2-3 years. Therefore, Medco's ratings currently do not incorporate any cash inflows from these businesses as well.

Medco's liquidity profile is weak with cash and cash equivalents of $184 million as of 31 March 2017 against debt maturing of $481 million over the next 12 months. The proceeds from the proposed bond issue and the plannedpaw rights issue will improve liquidity to more comfortable levels. Medco also has a long track record of refinancing its bank loans with strong access to domestic banks.

The stable outlook incorporates the expectation that production growth from Medco's existing fields will improve cash flows and company will remain committed to deleveraging, such that its credit metrics will improve to levels more appropriate for its ratings over the next 12-18 months.

The ratings will be downgraded if Medco a) fails to complete its proposed bond issuance or the size of the issue is not large enough to improve its liquidity profile, b) fails to execute its deleveraging plan or there are material delays in implementation, c) makes any material debt-funded acquisitions before completion of the debt reduction exercise, and d) provides funding support to its mining or power businesses.

Specifically, the ratings will be downgraded, if its credit metrics fails to improve over the next 12-18 months, such that adjusted debt/ EBITDA increases above 5.5x, RCF/ adjusted debt falls below 10%, and EBITDA/interest expenses falls below 3x.

Upward pressure on the ratings over the next 12-18 months is limited, given the weak credit metrics and liquidity profile. The ratings could be upgraded after completion of the debt reduction plan if a) adjusted debt/EBITDA falls below 4.5x, RCF/adjusted debt increases above 15%, and EBITDA/interest expenses increase above 4x, and b) cash and cash equivalents cover at least the amount of debt maturing over the next 12 months, all on a sustained basis.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) (Medco) is predominantly an oil and gas exploration and production (E&P) company with additional operations in downstream oil and gas activities, power generation, and copper, gold and coal mining. Medco reported proved developed reserves of 136.6 mmboe as of 31 March 2017, and oil and gas production volumes of 64.1 mboepd (excluding service contracts) for twelve months ended 31 March 2017.

Medco has been listed on the Jakarta Stock Exchange since 1994. It is 35.7% owned by Encore Energy Pte. Ltd. (unrated), 20.7% by Clio Capital Ventures (unrated), and 10% by Mitsubishi Corporation (A2 negative). 26.3% of Medco is publicly owned, with the balance owned by other investors.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vikas Halan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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