JAKARTA (TheInsiderStories) — Moody’s Investors Service has downgraded to Ba2 from Ba1 the corporate family rating (CFR) of Saka Energi Indonesia (P.T.) and the rating on its $625 million senior unsecured notes due 2024. The outlook on all ratings is negative.
“The downgrade reflects our view that financial support from Saka’s parent, Perusahaan Gas Negara (P.T.) (IDX: PGAS, Baa2 stable), has weakened following the early shareholder loan repayment, and that its declining reserves and production will pressure its operating profile and credit metrics in 2019-20,” says Rachel Chua, a Moody’s Assistant Vice President and Analyst.
In July 2018, Saka repaid US$200 million of the $838 million shareholder loan at PGAS’s request, which is well in advance of the January 2021 debt maturity.
“The early repayment is effectively a cash extraction by PGAS, which is incongruent with our earlier expectations that the shareholder loan would either be extended or converted to equity, in line with past track record,” adds Chua, who is also Moody’s Lead Analyst for Saka.
Nonetheless, the three-notch uplift incorporated in Saka’s Ba2 ratings continues to reflect Moody’s expectations of extraordinary support from parent PGAS in an event of distress.
Wholly-owned by PGAS, Saka remains strategically important to the parent’s vertical integration strategy as the only upstream subsidiary. The cross default clauses between the two entities, as well as PGAS’s exposure to reputation risk should Saka default remain intact.
PGAS is in the process of acquiring a 51% stake in Pertamina Gas, a downstream gas transmission and distribution company. The acquisition is part of the reorganization within Pertamina (P.T.) (Baa2 stable), which now owns 57% of PGN following a non-cash stake transfer from the Indonesian government (Baa2 stable) in April 2018.
In addition, there is increasing pressure on Saka’s operating profile as its annual production will fall to 42-43 thousand barrels of oil
equivalent per day (kboepd) in 2019-20 after two of its production
licenses expired in Q3 2018. Its production in 1H 2018 was 55.1 kboepd.
Absent inorganic growth through acquisitions, Moody’s expects Saka’s reserve life will decline to around 5 years over the next 12 months.
Saka’s credit metrics will also remain weak over the next 12-18 months, with adjusted retained cash flow (RCF)/debt at 13%-14% and adjusted debt/EBITDA around 5.0x.
Saka’s Ba2 CFR continues to be supported by (1) the high revenue
visibility from its long-term fixed-priced gas sales contracts with high quality counterparties; (2) its low operating costs; and (3) its good liquidity profile with no debt maturing until late 2020.
At the same time, the CFR remains constrained by its small and decliningscale, as well as high geographical concentration risk.
The negative outlook reflects the heightened uncertainty relating to Saka’s role and importance to PGAS and the consolidated Pertamina/PGAS group, given the ongoing corporate reorganization. Given the negative outlook, a rating upgrade is unlikely.
Nonetheless, the rating outlook could be revised to stable following
completion of the ongoing reorganization within the consolidated
Pertamina/PGAS group if there is no change in (1) Saka’s ownership structure; (2) its strategic role as PGN’s key upstream operating entity and (3) the close working relationship between Saka and PGAS.
Clarity around a repayment plan for the remainder of the shareholder loan that does not point to a further weakening of financial support from PGN would also support a stable outlook.
Additionally, a change in outlook to stable would require for Saka to arrest its weakening operating profile while maintaining adjusted RCF/debt above 10%, adjusted debt/average daily production below $35,000 and adjusted EBITDA interest cover above 4.0x.
Saka’s ratings could be downgraded if (1) PGAS’s rating is lowered to Ba1; or (2) the ongoing reorganization results in a change in Saka’s ownership structure or strategic importance to PGAS; or (3) there is a change in the relationship between Saka and PGAS, including operational integration or management oversight, that results in a lowering of Moody’s support expectation incorporated in the ratings.
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%, adjusted debt/ average daily production exceeding $35,000 or adjusted EBITDA/interest falling below 4x.
Saka Energi Indonesia (P.T.) is an independent oil & gas exploration and production company in Indonesia. At 30 September 2018, Saka had proved and probable reserves of 117.0 million barrels of oil equivalent.
The company holds working interests in nine oil and gas blocks, six of which are producing. In the first half of 2018, Saka reported net production of 55.1 thousand barrels of oil equivalent per day.
Saka is wholly-owned by natural gas distribution and transmission
company, Perusahaan Gas Negara (P.T.) (PGAS, Baa2 stable). In turn, PGN is 56.96% owned by Indonesia’s 100% state-owned national oil company, Pertamina (P.T.) (Pertamina, Baa2 stable).
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