PT Saka Energi Indonesia Assigned #BB# Rating With Positive Proposed Notes Rated #BB#

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:31
SINGAPORE--18 Apr--S&P Global Ratings

SINGAPORE (S&P Global Ratings) April 18, 2017--S&P Global Ratings said today that it had assigned its 'BB' long-term corporate credit rating to Indonesia-based upstream oil and gas exploration and production (E&P) company PT Saka Energi Indonesia (Saka). The outlook is positive.

At the same time, we assigned our 'axBBB' long-term ASEAN regional scale rating to the company. We also assigned our 'BB' issue rating to the U.S.-dollar-denominated senior unsecured notes that Saka proposes to issue. The issue rating is subject to our review of the final issuance documentation.

"Our ratings on Saka reflect our assessment of the company's 'b+' stand-alone credit profile (SACP) and our view that Saka will benefit from extraordinary support from its parent, Indonesia-based gas distributor PT Perusahaan Gas Negara (Persero) Tbk.," said S&P Global Ratings credit analyst Vishal Kulkarni.

Saka's SACP reflects the company's small scale, short operating record, geographical and cash flow concentration from a few fields in Indonesia, and elevated investment appetite. Saka's fairly stable cash flows, gas-sale contracts with creditworthy counterparties, manageable funding needs, ongoing parent support, and favorable profitability temper these weaknesses.

Saka is a strategically important subsidiary of PGN, in our view. We believe the company forms an important part of PGN's upstream integration strategy. PGN has invested more than US$1.0 billion in Saka in the form of equity. This indicates the parent's willingness to support Saka during its inception and asset-acquisition phase, until the subsidiary gains sufficient scale.

We expect PGN to maintain majority ownership and control over Saka, and share management with the company over the next five years at least. PGN also has an incentive to provide extraordinary support to Saka in case of stress because PGN's loan documents contain a cross-default clause with Saka. Moreover, Sakahas been reasonably successful in asset acquisition and growth in cash flows, and we expect the company to contribute up to a third of PGN's consociated cash flows over next two to three years.

Constraining our assessment of Saka's strategic importance to PGN are: Saka's limited operational record; operations in a new industry segment of E&P as against PGN's traditional gas transmission focus; and limited, albeit growing, integration with PGN's operations.

Saka's E&P business is riskier than PGN's very low risk regulated utility gas transmission and distribution business. The increasing contribution from Saka will likely weaken PGN's business risk profile, in our view.

We expect Saka's short operating record to continue to constrain our assessment of its SACP.

The operating and project execution risks are moderate for Saka, in our view, because seven of its 10 fields are managed by experienced operators such as Petroliam Nasional Bhd., China National Offshore Oil Corp., and Eni SpA. Moreover, Saka's fields are onshore or shallow water offshore, limiting operating complexities. However, with many of Saka's fields reaching maturity, we expect a natural decline in production, requiring the field partners to

invest in improved technologies or newer discoveries.

The production sharing contracts (PSCs) for two of Saka's blocks--South East Sumatra (SES) and Sanga Sanga--are due for renewal in 2018. However, the upstream oil and gas regulator has informed Saka that these will not be extended and these blocks will likely go to PT Pertamina (Persero). Our assessment of Saka's business risk profile already captures the potential downside to production in the event PSCs on those two blocks are not renewed.

Saka is exposed to asset and cash flow concentration because more than 80% of its production comes from its Indonesian fields.

Saka's focus on gas-–in terms of reserves and production–-increases offtake certainty and cash flow stability. We expect contribution of gas to Saka's cash flows to increase to about 70% over the next two to three years, from

about 50% currently.

Since its inception in 2011, Saka has invested in multiple fields using a mix of debt and equity. The company's reliance on debt and shareholder loans to build its asset base contributed to a fairly leveraged balance sheet.

As of Dec. 31, 2016, Saka has received shareholder loans of US$1.9 billion from PGN, and had about US$838 million outstanding. We acknowledge that PGN has converted part of such loans into equity to support Saka's asset acquisition and capex investments, while its cash flow was immaterial.

We expect Saka's financial ratios to improve in 2017 and 2018 compared with 2016 as its new assets start production. We estimate the company's annual EBITDA will exceed US$300 million for the next two to three years, from about US$182 million in 2016. Saka's ratios of debt to EBITDA and of FFO to debt will therefore improve to about 4.5x and 16% in 2017 and 2018, from about 7.0x and less than 12% in 2016.

Saka's appetite for investment–-both capex and acquisition of new reserves and fields-–will remain elevated over the next 12 to 24 months, in our view. We expect the capex in existing fields to consume all the operating cash flows.

We expect that Saka will need to raise new funds of US$150 million for capex and to refinance US$300 million of debt maturities till 2019. This funding requirement is unlikely to affect the company's liquidity.

"The positive outlook on Saka over the next 12 to 24 months reflects the positive outlook on PGN, which, in turn, reflects the outlook on the sovereign rating on Indonesia and our expectation that PGN's SACP will remain 'bbb-' over the period," said Mr. Kulkarni.

We could revise the outlook on Saka to stable if we revise the outlook on PGN to stable. We could also revise the outlook on Saka to stable if: (1) we lower our assessment of PGN's SACP to below 'bbb-'; (2) we revise the outlook on Indonesia to stable; or (3) we lower Saka's SACP.

We could lower Saka's SACP if: (1) the company's investments, including organic spending or acquisitions, are higher than we expect; or (2) its production growth, especially from the Muara Bakau and Pangkah fields, is slower than we anticipate, such that its FFO-to-debt ratio falls below 12% sustainably.

We could raise the rating on Saka if we raise our rating on PGN and maintain our assessment of the relationship between PGN and Saka. We could upgrade PGN if we raise the sovereign rating, while the company's maintains a SACP of at least 'bbb-'.

The prospects for a higher SACP for Saka are limited over the next 12 months, given the negative free operating cash flow and elevated capex at a time when key fields are ramping up and having their PSCs renewed.


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