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Rating Action:

Moody's downgrades Saka Energi to B1; changes outlook to negative

30 Apr 2020

Singapore, April 30, 2020 -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Saka Energi Indonesia (P.T.) to B1 from Ba2. At the same time, Moody's has downgraded the rating on its senior unsecured notes to B1 from Ba2.

The outlook on the ratings has changed to negative from rating under review.

Today's rating action concludes the review for downgrade, which was initiated on 31 January 2020.

RATINGS RATIONALE

"The downgrade reflects our view that Saka's strategic importance to its parent, Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable), and its operating profile have both diminished," says Vikas Halan, a Moody's Senior Vice President.

PGN's announcement in February 2020[1] of its plan to restructure and streamline its subsidiaries in order to focus on midstream and downstream businesses has reinforced Moody's view that Saka's importance to PGN has declined.

Saka's upstream operations had previously served as a source of feedstock security for PGN's gas pipelines, and was a key driver behind PGN's vertical integration strategy. Since the completion of the reorganization in 2018, where the Government of Indonesia (Baa2 stable) transferred its ownership in PGN to Pertamina (Persero) (P.T.) (Baa2 stable), Saka's strategic importance to PGN has been diminishing. This is because Pertamina's extensive gas production in Indonesia can serve as feedstock for PGN's gas pipelines, thereby displacing Saka.

Nonetheless, the two-notch uplift incorporated in Saka's B1 ratings reflect Moody's expectations of extraordinary support from PGN in an event of distress. Moody's assessment of parental support takes into account (1) reputational and other funding risks to PGN should Saka default; and (2) PGN's extensive involvement in the financial and operational management of Saka.

On 15 April 2020, Saka paid $127.7 million to the tax authorities following the Indonesian Supreme Court's decision in January 2020 to hold Saka liable for taxes of $127.7 million. Another $127.7 million of tax penalty that Saka has to pay is currently under discussion with the tax authorities. The tax liability relates to the purchase of a 65% stake in Pangkah block by Saka from Hess Corporation (Ba1 stable) in 2014.

"Saka's payment to the tax authorities will weaken its liquidity position amid a challenging price environment, and will constrain the investments needed for Saka to stem a deterioration in its operating profile," adds Vikas, who is also Moody's Lead Analyst for Saka.

Without inorganic growth through acquisitions, Moody's expects Saka's reserve life will remain below five years. Its capital spending of $150-$200 million in 2020 will only allow the company to focus on maintaining existing operations in oil and gas fields. Saka's production levels will continue to decline to 30-31 thousand barrels of oil equivalent per day (kboepd) in 2020 from 51.5 kboepd in 2017. While Saka will benefit from an increase in its working interest in Muriah gas block to 100% from 20% in 2020, Moody's expects production from the gas block will yield less than 1.5 kboepd given the operational challenges at the field.

As such, Saka's credit metrics will remain weak over the next 12-18 months, with adjusted retained cash flow (RCF)/debt at 8%-10% and adjusted EBITDA/interest around 4x-5x. Moody's projections incorporate the assumptions that Saka will (1) pay the full tax liability in 2020 using internal cash as it continues to pursue legal avenues to contest the ruling, and (2) secure an extension from PGN on the maturity of its shareholder loan due in January 2021.

Further, Moody's assumes that Indonesia's price cap on downstream gas selling price at $6 per million british thermal units will not materially affect Saka's earnings and cash flows. This is based on Moody's expectation that Saka would receive compensation from the government for the shortfall in margins, although there is regulatory uncertainty on the mechanism and process of reimbursement.

ESG CONSIDERATIONS

Saka's ratings incorporate the environmental risk that the company is exposed to through its oil and gas operations. However, this risk is somewhat mitigated by the high proportion of natural gas in its production mix, which stands at about 83% of total production.

Saka also faces social risks, especially in terms of responsible production and health and safety issues. However, this risk is mitigated by the company's long track record of operating its businesses without any major incidents.

As for governance factors, the rating incorporates Saka's concentrated 100% ownership by PGN and its status as a private company. Despite being unlisted, Saka publishes quarterly financial statements and maintains a reasonable degree of transparency into its operating performance.

RATING OUTLOOK

The negative outlook reflects heightened uncertainty over (1) the outcome of PGN's planned restructuring, and (2) Saka's ability to manage its production decline and replenish its depleting reserves.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, a rating upgrade is unlikely.

Nonetheless, the rating outlook could be revised to stable if (1) there are positive developments and clarity on Saka's strategic role within the consolidated Pertamina/PGN group; (2) there is clear financial support from PGN including equity injections and conversion of shareholder loans to equity that significantly improves Saka's liquidity position, and (3) Saka is able to improve its operating profile without further straining its credit metrics.

Quantitative metrics that Moody's would consider to revise Saka's outlook to stable include (1) expansion of its reserves and production organically or inorganically, resulting in a reserve life of over five years; (2) its adjusted RCF/debt staying above 10%, and (3) its adjusted EBITDA interest cover staying above 2.5x.

Saka's ratings could be downgraded if (1) there is a material change in Saka's ownership structure; (2) Saka's importance to PGN deteriorates such that it does not qualify as a material subsidiary under the terms and conditions of the unsecured notes due in 2024 issued by PGN; or (3) there is a change in the relationship between Saka and PGN, including operational integration or management oversight, that results in a lowering of Moody's support expectation incorporated in the ratings.

In addition, Moody's would downgrade Saka's ratings if (1) it does not secure an extension of the remainder of the shareholder loan due on 1 January 2021 within the next six months, or (2) Saka makes early repayments on the outstanding shareholder loan which would further strain its own standalone credit profile.

The ratings could also be downgraded if Saka's standalone credit profile deteriorates as a result of a large debt-funded acquisition or if the company's reserves and production continue to decline.

Credit metrics indicative of a downgrade include adjusted RCF/debt falling below 10% or adjusted EBITDA/interest falling below 2.5x.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Saka Energi Indonesia (P.T.) is an independent oil & gas exploration and production company in Indonesia. The company holds working interests in eleven oil and gas blocks, six of which are producing. In 2019, Saka reported net production of 34.4 thousand barrels of oil equivalent per day.

Saka is wholly-owned by natural gas distribution and transmission company, PGN. In turn, PGN is 56.96% owned by Indonesia's 100% state-owned national oil company, Pertamina.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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
Senior Vice President
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

Ian Lewis
Associate Managing Director
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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