JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B1 corporate family rating of publicly listed, PT Medco Energi Internasional Tbk (IDX: MEDC). The agency also affirmed the B1 ratings on the backed senior unsecured bonds issued by Medco Strait Services Pte. Ltd., Medco Platinum Road Pte. Ltd., Medco Oak Tree Pte. Ltd. and Medco Bell Pte.Ltd.
These bonds are unconditionally and irrevocably guaranteed by the oil and gas producer. It said, the outlook on all ratings has changed to negative from stable.
“The rating affirmation reflects our expectation that MedcoEnergi‘ credit profile will remain resilient amid the volatile oil price and base on our scenario the oil price recovery in the second half of 2020 and through 2021,” says Vikas Halan, an analyst at Moody’s on Tuesday (03/25).
He rated the rating reflects the company’ strong liquidity profile, fixed price gas contracts and plans to defer some of its capital expenditure to conserve cash. He also noted, MedcoEnergi credit profile will likely deteriorate if oil prices remain low for a prolonged period, underpinning our negative outlook.
In Moody’s base case scenario, the effects from the COVID-19 will persist into the second quarter of 2020, with improving economic fundamentals in the second half of the year. Under this scenario, Moody’s expects oil prices to average US$40 – 45 a barrel in 2020, returning to $50 – 55 per barrel in 2021.
However, in a downside scenario where economic weakness persists longer, oil would average $30 – 35 a barrel in 2020 and $35 – 40 per barrel in 2021. Moody’s expects the company’ adjusted net debt to fall below 10 percent and its adjusted net debt/EBITDA to increases above 4 times in 2020.
If the price recovery in the second half of 2020 through 2021, Moody’s expects MedcoEnergi credit metrics to improve to levels more appropriately positioned for its B1 ratings. The company has also announced measures to reduce its capital spending by about $100 million and its operating expenditure by about 15 percent over the next two years.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.
The oil and gas exploration and production sector has been one of the sectors most significantly affected by the shock given its sensitivity to demand and oil prices. More specifically, the weaknesses in MedcoEnergi credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and remains vulnerable to the outbreak continuing to spread and oil prices remaining weak.
“We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety,” said Halan.
Today’ action reflects the impact on MedcoEnergi of the breadth and severity of the oil demand and supply shocks, and the broad deterioration in credit quality it has triggered.
The Panigoro-owned company’ B1 reflects the scale and geographic diversification of its reserves and production and the fact that nearly one-third of its total sales volume is natural gas sold at fixed prices, generating about $250 million of EBITDA that can cover its interest expense.
At the same time, the B1 remains constrained by MedcoEnergi‘ exposure to the cyclicality of commodity prices, its acquisitive growth appetite, and the execution risk associated with its annual investment plan. In addition, the rating benefits from its proactive liquidity management with the company refinancing its upcoming debt maturities well in advance, increasing the average weighted debt maturity profile of its debt.
The producer’ liquidity profile is strong with cash and cash equivalents of $1.1 billion as of March 2020 (excluding the unit PT Medco Power) and undrawn credit facilities of $250 million. The cash balance includes cash in escrow accounts for repayment of US Dollar denominated bonds due in 2022, and for the partial repayment of the company’s IDR bonds due in 2021, all totaling about $650 million.
Excluding the cash in escrow accounts, MedcoEnergi has cash and cash equivalents of about $420 million against $288 million of debt maturities over next two years (excluding debt which will be paid from cash in escrow account). As such, the company does not have near-term liquidity issues as long as its cash flow operations is able to cover its capital spending.
A change in outlook to stable from negative will require a sustained improvement in the crude oil price environment, such that the annual average is above $45 – 50 per barrel. Significant deleveraging through asset sales or proceeds from equity issue could also cushion the impact from low oil prices.
In addition, a stable outlook would also require the company to maintain strong liquidity with its cash and cash equivalents covering at least the amount of debt maturing over the next 12 months.
Moody’s could downgrade MedcoEnergi‘ ratings if oil prices drop below Moody’s expectation, causing Medco’s credit metrics to weaken to level inappropriate for its ratings. Any further debt funded acquisition could also put downward pressure on the company’s ratings.
Established in 1980 and headquartered in Jakarta, the Panigoro’ firm is a Southeast Asian integrated energy and natural resources company listed in Indonesia with three key business segments, oil and gas, power and mining.
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