JAKARTA (TheInsiderStories) – Moody’s Investors Service has placed on review for downgrade the Ba2 corporate family rating (CFR) of PT Saka Energi Indonesia and the Ba2 rating on its US$625 million senior unsecured notes due 2024. The outlook on all ratings has been changed to a rating under review from negative.
“The review for downgrade follows the Indonesian Supreme Court’s decision to hold Saka liable for taxes and penalties of $255.4 million in total, which will weaken Saka’s liquidity position especially if it also has to repay its shareholder loan due in January 2021,” says Vikas Halan, a Moody’s Senior Vice President, in a statement.
Saka had cash and cash equivalents of approximately $400 million as of 31 December 2019, compared to a $438 million loan from its parent– PT Perusahaan Gas Negara (PGN, Baa2 stable) — maturing in January 2021. Saka will use its internal cash to pay the taxes and penalties and will seek to extend the maturity of the outstanding shareholder loan.
The tax liability relates to the purchase of a 65 percent stake in Pangkah block by Saka from Hess Corporation (Ba1 stable) in 2014. Saka had initially won the litigation with the Indonesian tax authorities at the tax courts in 2018. Saka will seek recovery of these liabilities through legal avenues, however, the outcome and timing of such actions remain uncertain.
The decline in Saka’s cash balance resulting from the tax payment will make it challenging for Saka to make the necessary investments to arrest the decline in its production and replenish its depleting reserve base.
Saka’s production level declined to 35.7 thousand barrel of oil equivalent per day (kboepd) for the nine months ended 30 September 2019 from 49.6 kboepd in 2018. Saka’s proved developed reserves also declined to 44.1 million barrels of oil equivalent (mmboe) in 2018 from 77.1 mmboe in 2017. Such levels of production and reserves are weak for Saka’s standalone profile and do not support Saka’s Ba2 rating, which incorporates a three-notch uplift from expected extraordinary support from PGN.
The review will focus on both Saka’s standalone profile and the support incorporated in Saka’s rating. More specifically, the review will focus on 1) whether and under what terms PGN is amenable to extend the maturity of its shareholder loan to Saka; 2) the outcome of any steps taken by Saka to recover the tax payments; and 3) Saka’s strategy to replenish its declining production and reserves as its cash balance is depleted.
In terms of environmental, social and governance (ESG) factors, the ratings also consider the following: Saka’s rating incorporates the environmental risk that the company is exposed to through its oil & gas operations. However, this risk is somewhat mitigated by the high proportion of natural gas in its production mix, at about 83 percent of total production.
Saka also faces social risks, especially in terms of responsible production and health & safety issues. However, the 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 percent 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.
Saka’s ratings will be downgraded by at least one notch if Moody’s assesses that the company’s liquidity profile has significantly weakened and if its operating profile fails to recover to a level that is consistent with its B2 equivalent standalone profile. The downgrade could be more than one notch if, in addition to a decline in its standalone profile, Moody’s also assesses that expected extraordinary support from PGN no longer justifies a three-notch uplift. This could result from, among others, PGN failing to extend the maturity of the shareholder loan it provides to Saka.
Saka Energi Indonesia 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 nine months ended September 2019, Saka reported net production of 35.7 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 percent owned by Indonesia’s 100 percent state-owned national oil company, PT Pertamina (Baa2 stable).
Written by Lexy Nantu, Email: email@example.com