Moody's affirms Medco Energi's B1 CFR; outlook stable

(Singapore, October 12, 2023) -- Moody's Investors Service (Moody's) has affirmed the B1 corporate family rating (CFR) of Medco Energi Internasional Tbk (P.T.) (Medco) and maintained the outlook at stable.

Moody's has also affirmed the B1 ratings on the outstanding backed senior unsecured bonds issued by Medco's wholly-owned subsidiaries. These bonds are unconditionally and irrevocably guaranteed by Medco. The outlooks on these ratings are also maintained at stable.

At the same time, Moody's has assigned a B1 rating and a stable outlook to Medco's proposed senior unsecured bond to be issued by Medco Maple Tree Pte. Ltd., a wholly-owned financing subsidiary of Medco.

A full list of affected ratings can be found at the end of this release

"The ratings affirmation reflects our expectations that Medco's credit metrics will remain strong over the next 12-18 months. We forecast its retained cash flow/adjusted debt will be around 20%-25% and its leverage will stay under 3.0x over the same period," says Rachel Chua, a Moody's Vice President and Senior Analyst.

"The ratings remain constrained due to the company's inorganic growth strategy, uncertainty around the impact of the company's announced acquisition in the Middle East and outcome of its ongoing discussions with PGN on the renewal of its gas sales agreement," adds Chua, who is also the lead analyst for Medco. 

RATINGS RATIONALE

Medco is finalizing its discussions with Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable) on the renewal of its gas sales agreement for gas volumes accounting for around 40% of its total gas production. Unfavorable terms on the contract renewal such as significantly lower net returns to Medco would be credit negative.

Moody's projects Medco will generate annual EBITDA of around $1.0 billion-$1.1 billion over the next two years. The agency's projections reflect its medium-term oil price assumption of $55-$75 per barrel. Nonetheless, given that fixed-price gas accounts for around 60% of Medco's production, oil price volatility will not affect Medco to the same degree as it will for its peers.

Medco's B1 CFR continues to reflect its moderate scale of production; and revenue visibility from its fixed-price natural gas sales agreement, which accounts for around 60% its production volume. It also takes into account the company's strong credit metrics and very good liquidity.

The company's proactive liability management over the past year has also helped to support its credit metrics. In 2022, Medco bought back $402 million of US dollar bonds through a tender offer and subsequent secondary market repurchases using a mixture of cash and bank borrowings, which resulted in interest savings of around $10-$15 million annually.

At the same time, Medco's CFR is constrained by its growth appetite through acquisitions and capital investments, its limited reserve life, its exposure to cyclical commodity prices, and execution risks associated with its ConocoPhillips Indonesia Holding Ltd (CIHL) acquisition as well as the recently announced acquisition.

The stable rating outlook reflects Moody's expectation that Medco will maintain very good liquidity and that its credit metrics will remain strong over the next 12-18 months. Moody's also expects the company will continue to maintain financial discipline even as it pursues growth.

Medco's liquidity is very good over the next 12-18 months. As of 30 June 2023, Medco had cash and cash equivalents of around $304 million, cash in escrow for debt and interest repayment of around $137 million, and undrawn credit facilities of around $469 million, excluding Medco Power Indonesia (P.T.). As such, Medco does not have near-term liquidity issues as Moody's expects the company to generate sufficient operating cash flow to address its spending requirements.

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

An upgrade of Medco's rating could occur if (1) the company maintains its strong credit metrics and its very good liquidity profile; (2) provides greater clarity around the scale and pace of its longer-term growth plans.

Credit metrics supportive of an upgrade include:

» Adjusted debt/EBITDA below 3.0x,

» Adjusted retained cash flow (RCF)/debt above 20%, and

» Adjusted EBITDA/interest expense above 4.5x

Downward pressure on Medco's rating could build if the company's credit metrics are weak for its rating level or its liquidity deteriorates. Debt-funded acquisitions could also result in downward pressure on the company's rating.

Quantitative metrics indicative of downward pressure include:

» Adjusted debt/EBITDA rising above 4.0x

» Adjusted RCF/adjusted debt falling below 10% or

» Adjusted EBITDA/Interest expense falling below 3.5x

LIST OF AFFECTED RATINGS

Outlook Actions:

..Issuer: Medco Energi Internasional Tbk (P.T.)

....Outlook, Remains Stable

..Issuer: Medco Bell Pte. Ltd.

....Outlook, Remains Stable

..Issuer: Medco Laurel Tree Pte. Ltd.

....Outlook, Remains Stable

..Issuer: Medco Maple Tree Pte. Ltd.

....Outlook, Assigned Stable

..Issuer: Medco Oak Tree Pte. Ltd.

....Outlook, Remains Stable

..Issuer: Medco Platinum Road Pte. Ltd.

....Outlook, Remains Stable

Affirmations:

..Issuer: Medco Energi Internasional Tbk (P.T.)

.... Corporate Family Rating, Affirmed B1

..Issuer: Medco Bell Pte. Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed B1

..Issuer: Medco Laurel Tree Pte. Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed B1

..Issuer: Medco Oak Tree Pte. Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed B1

..Issuer: Medco Platinum Road Pte. Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed B1

Assignments:

..Issuer: Medco Maple Tree Pte. Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Assigned B1

The principal methodology used in these ratings was Independent Exploration and Production published in December 2022 and available at https://ratings.moodys.com/documents/PBC_1341932. Alternatively, please see the Rating Methodologies page on  https://ratings.moodys.com for a copy of this methodology.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) is a Southeast Asian integrated energy and natural resource company listed in Indonesia with three key business segments -- oil and gas, power and mining. (ends)