Singapore, January 07, 2021 -- Moody's Investors Service has downgraded the corporate family rating (CFR)
and the senior unsecured rating of Saka Energi Indonesia (P.T.)
to B2 from B1. At the same time, Moody's has placed the CFR
and the rating on the senior unsecured notes on review for downgrade.
The outlook on all ratings has been changed to rating under review from
negative.
"The downgrade reflects our expectation of a lower likelihood of
financial support from its parent, Perusahaan Gas Negara (P.T.)
(PGN, Baa2 stable), following Saka's partial repayment
of its shareholder loan," says Hui Ting Sim, a Moody's
Analyst. "We view the repayment as effectively a cash extraction
by PGN that will weaken Saka's liquidity at a time of subdued oil
prices and while Saka still likely has to pay a significant $127.7
million tax penalty."
"The review for downgrade reflects the heightened liquidity risk
at Saka after its payment to PGN, especially if the company is also
required to pay the full tax penalty to the Indonesian tax authorities
over the next 12 months," adds Sim.
Moody's review will focus on Saka's liquidity profile.
More specifically, the review will focus on 1) the outcome of Saka's
discussions with tax authorities to seek affordable payment terms;
2) its access to financing, and 3) the management of its operating
and investing cash flows. Moody's expects to conclude the
review within 90 days.
RATINGS RATIONALE
On 5 January, PGN announced[1] that Saka will repay $77.6
million of the $155.2 million shareholder loan owed to PGN
on 6 January 2021. Meanwhile, the maturity of the balance
$77.6 million will be extended by one year to 6 January
2022. Saka had cash and cash equivalents of $268 million
as of 30 September 2020, and will use internal cash for the partial
repayment.
The partial repayment deviates from Moody's earlier expectation
that the maturity of the shareholder loans will be extended without any
repayment. This development also diverges from PGN's original
intention expressed in August 2020[2] that it will extend the shareholder
loan by two years.
Saka's partial repayment of the shareholder loan will reduce its
liquidity buffers to weather lower oil prices and service its tax penalty.
The tax penalty relates to the 2014 purchase of a 65% stake in
Pangkah block by Saka from Hess Corporation (Ba1 stable). It already
paid $127.7 million to the tax authorities in April 2020,
and the company is liable to pay another $127.7 million
of penalty. Saka's liquidity will be strained if it has to
pay the full $127.7 million over the next 12 months.
The company is currently discussing the potential for affordable payment
terms with the tax authorities.
Saka currently has limited bank lines available, and its access
to financing will likely be constrained by the uncertainty around its
role and relevance within PGN and Pertamina (Persero) (P.T.)
(Baa2 stable) corporate structure. Its liquidity will also be weak
if the company is unable to secure an extension from PGN on the maturity
of its $361 million in shareholder loans due January 2022.
Oil and gas production at Saka fell to 25.7 thousand barrels of
oil equivalent per day (kboepd) in the first nine months of 2020 from
34.4 kboepd in 2019. Moody's estimates Saka will produce
around 23-27 kboepd of oil and gas over the next two years.
Moody's also expects Saka will maintain capital spending at low
levels around $100 million per annum to preserve liquidity.
The one-notch uplift from parental support incorporated in Saka's
B2 ratings takes into account (1) the cross-default clauses between
PGN and Saka, and (2) the reputational and funding risks to PGN
and its ultimate shareholder, Pertamina, should Saka default.
ESG CONSIDERATIONS
Saka's ratings consider the high environmental risk it faces through its
oil and gas operations. Specifically, oil and gas exploration
and production companies such as Saka are exposed to very high carbon
transition risk. However, this risk is mitigated by the very
high proportion of natural gas in Saka's production mix, which
accounts for about 83% of total production.
Saka is also exposed to 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.
In terms of governance considerations, 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
of its operating performance. Today's rating action considers
the governance risk stemming from PGN's request for Saka to partially
repay its shareholder loan, and its implications on Saka's
financial profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's will downgrade Saka's rating by at least one notch
if the company's liquidity profile continues to deteriorate.
This could arise from, among others, Saka being unsuccessful
in seeking affordable payment terms from the authorities to pay its tax
penalty. Moody's could also downgrade Saka's rating
if (1) the company continues to repay the shareholder loans; (2)
PGN does not extend the maturity of the outstanding shareholder loans;
(3) Saka's financial profile is materially hurt by amendments to
the terms of the shareholder loans; or (4) there is a material change
in Saka's ownership structure.
On the other hand, the ratings could be confirmed at current levels
if Moody's assesses that Saka is able to improve its liquidity and
credit quality to a level consistent with its current standalone profile.
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 the first nine months of 2020, Saka reported
net production of 25.7 thousand barrels of oil equivalent per day.
Saka is wholly-owned by natural gas distribution and transmission
company, Perusahaan Gas Negara (P.T.) (PGN).
In turn, PGN is 56.96% owned by Indonesia's 100%
state-owned national oil company, Pertamina (Persero) (P.T.).
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.
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At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
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am Main 60322, Germany, in accordance with Art.4 paragraph
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REFERENCES/CITATIONS
[1] PGN announcement filed on Indonesia Stock Exchange 05-Jan-2021
[2] Saka's 2020H1 reviewed financial statements 31-Aug-2020
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.
Hui Ting Sim
Analyst
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
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Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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