Medco Energi refines spending plans

The Indonesian oil and gas company re-tweaks its capital expenditure plans and mulls cheap Singapore dollar bond as lower oil prices threaten profitability

The recent plummet in crude prices have prompted oil companies to re-tweak their investment plans. Indonesia-based oil and gas company Medco Energi Internasional is no exception to this phenomenon.

Medco is readjusting its capital expenditure plans for the year, trimming investments made in the exploration of oil and gas, Lany Wong, chief financial officer of Medco told FinanceAsia in Jakarta.

The company is focusing instead on growing its existing business, monetising new projects that are about to begin full commercial operations whilst at the same time, looking for cheaper sources of funding.

“The current low oil price environment mutually drives all oil and gas companies to [turn to] more efficient initiatives, which include costs reduction and capital efficiencies,” said Wong, adding that Medco’s currently renegotiating contracts with its suppliers and vendors.

This capex-cutting exercise, which echoes the moves made by large global oil companies, is crucial given that 50% of Medco’s revenue originates from crude oil.

The commodity sank almost 50% last year to below $50 per barrel — although it has rebounded to $54 this week — as the US pumped oil at the fastest rate in more than three decades while the Organisation of Petroleum Exporting Countries resisted calls to cut supply in November.

On January 29, Royal Dutch Shell said it would reduce investment by $15 billion over the next three years while ConocoPhillips said it would cut its capex plan by 15% having previously lowered its budget by 20% in December.

There are two sides to the coin though. While there are challenges, there are also opportunities. “There is a saying that opportunities rise during crisis,” said Wong. “Now is a buyer market in the M&A space of the industry as companies tend to be undervalued. Although it hasn’t happened for us, we are cautiously looking.”

Medco is targeting revenues of $704 million this year, down 9% from last year's estimated $771 million, due to a slump in global oil prices, the Kontan newspaper reported, quoting CEO Lukman Mahfoedz.

The company booked revenues of $551.9 million in the first nine months of 2014, down 10% from $613.1 million in the same period a year earlier. Net profit was down 2% at $13.1 million.

Keep calm and carry on

One of the company’s key focuses this year is to monetise Indonesia’s Donggi-Serono liquefied natural gas (LNG) project — of which Medco has a share in along with other major oil and gas companies, including Japan’s Mitsubishi Corp and South Korea’s Kogas.

The project, which is located in Banggai district Central Sulawesi, is expected to commence production in mid-2015.

“This project offers great economics despite not being a significant contributor in terms of increase in total production volume,” said Wong. “It also aids in mitigating the financial impact of low oil prices on the company.”

The $2.8 billion Donggi-Serono venture — which is expected to produce as much as 300 tonnes of LNG per day — is one of several major gas infrastructure projects that the country hopes will meet mushrooming energy demands at home and around the region. Medco will receive 30% of that production volume, which is exposed to movement of oil prices. 

To counter the decline in revenues stemming from lower oil prices, Medco is keen to expand its gas reserves as its price is currently fixed by the Indonesian government at $9.45 per mmcf.

On January 28, Medco signed a sales and purchase agreement for the production of gas in Aceh and South Sumatera, demonstrating its commitment to continuously develop the Indonesian gas market. Both locations will produce a total gas volume of over 200 trillion British thermal unit (TBtu) or total gas sales value of over $2 billion.

“This is a significant milestone for us in monetising our gas reserves,” said Wong.

Cheap thrill

The search for cheap funding is on for Medco as it seeks to payback an outstanding $200 million loan from state-owned Bank Negara Indonesia — half of which has been partially refinanced last year.

The company — a debt veteran in the domestic and  international — has been actively monitoring the Singapore dollar market and is in the works of putting together a proposal for a potential bond offering.

“As a company, we want to diversify and widen our credit exposures,” said Wong, adding that Medco hopes to complete the estimated S$150 million four- or five-year bond transaction by the second quarter this year.

Singapore’s debt market is able to offers issuers greater flexibility and better pricing than the US dollar market, although it is slightly more expensive than the Indonesian market. The cost difference funding in Singapore dollars versus the US dollars could be as much as 200bp, estimated Wong.

“One example of flexibility it offers is the registration processes whereby there is no requirement to immediately roll out a Singapore dollar bond upon registration,” said Wong to FinanceAsia. “The issuer has the timing flexibility as to when to tap the market. As such, we have more options to find the right window to achieve the most competitive pricing.”

Medco has upcoming debt maturities of $236 million over the coming 12 months from September 30, 2014, according to Standard & Poor’s in December.

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