Moody's revises Saka's outlook to stable from negative; affirms B2 ratings

(Singapore, October 07, 2021) -- Moody's Investors Service has affirmed Saka Energi Indonesia (P.T.)'s B2 corporate family rating and senior unsecured rating.

At the same time, Moody's has changed the rating outlook to stable from negative.

"The outlook revision to stable reflects our expectation that Saka's liquidity will be very good over the next 12-18 months following the extension of the maturity of its shareholder loan from its parent, Perusahaan Gas Negara (P.T.) (PGN, Baa2 stable) and an improved oil & gas price environment," says Hui Ting Sim, a Moody's Analyst.

"We also expect Saka's operational profile to improve over the next 12-18 months as the company increases production from the Sidayu fields after its successful drilling program," adds Sim.

RATINGS RATIONALE

On 30 September, PGN announced that it has signed an amendment with Saka to extend the maturity of its $361 million shareholder loan originally due in January 2022. Following the amendment, $77.6 million of Saka's shareholder loan will fall due in January 2023, $141.5 million in December 2024 and the remaining $141.5 million in December 2025. At the same time, the two companies agreed to adjust the interest rate associated with the shareholder loan.

Saka will have very good liquidity over the next 12-18 months following the shareholder loan extension. As of 30 June 2021, Saka had cash and cash equivalents of $176 million. Its cash balance, along with Moody's forecast of Saka's operating cash flow generation of $240-$250 million over the next 18 months, will be sufficient to cover its capital spending of around $160 million and the shareholder loan of $77.6 million due in January 2023. Moody's forecasts are based on its medium-term Brent crude price assumption of $50 to $70 per barrel.

Saka expects it will not be required to pay the potential tax penalty of $127.7 million based on its correspondence with Indonesia's tax office. The potential tax penalty liability relates to Saka's purchase of a 65% stake in Pangkah block from Hess Corporation (Ba1 stable) in 2014. The company is preparing to seek judicial review of the tax case and believes that it has grounds to win the appeal. Saka's liquidity buffer will reduce significantly if it is required to pay the tax penalty.

Saka's operational performance has improved after an output ramp-up at its Sidayu fields after executing on its drilling program. Furthermore, Saka produced gas volumes of around 3 thousand barrels of oil equivalent per day (kboepd) in the first half of this year at Muriah. Production at Muriah stopped in September 2019 and restarted by Saka after it took over operatorship in 2020. The production sharing contract at Muriah will expire this year, but Saka expects that it will be granted an extension by SKK Migas. Moody's now estimates that Saka will produce around 27-32 kboepd over the next two years, against the rating agency's earlier expectation of 23-27 kboepd.

Saka's credit metrics will also improve as a result of its improved operating performance and higher oil & gas prices. Moody's expects Saka's leverage as measured by adjusted debt/EBITDA to improve to below 5x in 2021 as compared to above 10x in 2020. Also, Saka's adjusted RCF/debt will improve to above 15% in 2021 as compared to below 5% in 2020.

Saka's B2 corporate family rating balances its small scale and need to invest to improve its operating profile with its long-term contracts with quality counterparties that are fixed price in nature. At the same time, the rating is constrained by its improved but still relatively volatile financial profile and its exposure to high geographic concentration risk as its production and reserves are primarily in Indonesia.

The one-notch uplift from parental support incorporated in Saka's B2 ratings takes into account (1) the cross-default clauses between PGN and Saka, and (2) the reputational and funding risks to PGN and its ultimate shareholder, Pertamina (Persero) (P.T.) (Baa2 stable), should Saka default.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Saka's ratings consider the very high environmental risk it faces through its oil and gas operations. Specifically, oil and gas exploration and production companies such as Saka are exposed to very high carbon transition risk. However, this risk is mitigated by the very high proportion of natural gas in Saka's production mix, which accounts for about 83% of total production.

Saka has a highly negative exposure to social risk, because of large responsible production risks inherent to the nature of upstream operations and the need to develop relationships with local communities. Saka's supply chain is also exposed to a degree of regulatory unpredictability, as demonstrated by the evolving policies on the pricing of natural gas sold to certain sectors within Indonesia.

In terms of governance considerations, the rating incorporates Saka's concentrated 100% 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 of its operating performance.

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

An upgrade of Saka's rating is unlikely unless (1) the company is able to address the maturity of its $625 million bond coming due in 2024, and (2) there is clarity on Saka's strategic role within the consolidated Pertamina/PGN group with clear financial support from its shareholders.

Saka's ratings could be downgraded if Moody's lowers its assessment of parental support incorporated in the ratings. This could be driven by (1) a material change in Saka's ownership structure; (2) Saka's importance to PGN deteriorates such that it does not qualify as a material subsidiary under the terms and conditions of the unsecured notes due in 2024 issued by PGN; or (3) Saka makes an early repayment of the shareholder loan, materially straining its liquidity.

The ratings could also be downgraded if Saka's standalone credit profile deteriorates because of weak liquidity or if the company's reserves and production continue to decline.

Credit metrics indicative of a downgrade include adjusted retained cash flow/debt falling below 10% or adjusted EBITDA/interest dropping below 2.5x.

The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Saka Energi Indonesia (P.T.) is an independent oil and gas exploration and production company in Indonesia. The company holds working interests in 11 oil and gas blocks, six of which are producing. In the first half of 2021, Saka reported net production of 26.5 kbpoed per day.

Saka is wholly owned by natural gas distribution and transmission company, Perusahaan Gas Negara (P.T.) (PGN). PGN is 56.96% owned by Indonesia's 100% state-owned national oil company, Pertamina (Persero) (P.T.).  (ends)