The assets of troubled upstream player Saka Energi could be put up for sale as part of an effort to resolve the heavily indebted company’s financial predicament amid a tussle between Indonesia’s state-owned enterprises (SOEs).
Crucially, Saka Energi is no longer deemed to be aligned with its parent, Indonesian gas company Perusahaan Gas Negara (PGN), which is partly state-owned. Significantly, the level of Saka’s operational integration and strategic importance to PGN has weakened since mid-2018 following the restructuring of state-owned oil and gas companies. In 2018, the government’s 57% share of PGN was transferred to state-owned Pertamina.
Saka’s position in PGN’s structure remains uncertain and a lack of continued capital support increases uncertainty about PGN’s commitment to Saka, reported analysts at Fitch Ratings.
Fitch views PGN’s instructions asking Saka to repay $77 million of the $155 million worth of shareholder loans due in January 2021 as evidence of weakening support. “The request came amid Saka’s tight liquidity, potentially large tax penalties on acquisitions, and a challenging operating environment,” said Fitch.
“Saka also does not have any material loan facilities nor concrete funding plans from PGN to address its 2024 bond maturity,” added Fitch.
“We believe Saka currently qualifies as a material subsidiary, as defined in the bond documentation of PGN’s $1.35 billion notes, and a default by Saka will trigger a cross-default provision in PGN’s bonds, which mature after Saka’s $625 million notes due in 2024,” said Fitch.
Moreover, continued deterioration in Saka’s asset profile and earnings could further weaken its materiality to PGN, cautioned Fitch.
Clearly Saka is in trouble. And the degree of support or importance of Saka within the nexus of Indonesian SOEs remains uncertain. Officials have floated the idea of integrating Saka into Pertamina, but the national oil company has said that it is still carrying out an internal review to find the best alternative solution for Saka.
“PGN had previously considered options, such as strategic investors or pursuing an IPO for Saka in 2019, but Saka must first fix its portfolio and assure investors of its prospects, including for production and discovery of oil and gas,” REDD Intelligence reported earlier this year. Indeed, PGN may find it difficult to “cut and run” given the cross-default clause tied to its $1.35 billion bond, warned REDD.
Saka Energi has become a hot potato. Pertamina, the natural acquirer, has been reluctant to absorb Saka, which is saddled with debt, and most likely has more liability than equity,
No doubt, Pertamina would like to acquire Saka’s best assets, but without taking responsibility for the company’s debts.
Industry sources told Energy Voice that Saka’s assets could be sold off individually to help cover the financial liabilities.
Saka currently manages ten production-sharing contracts (PSCs) in Indonesia and one shale gas block in the US, six of which are fully operated by Saka with a 100% interest stake. These are Pangkah PSC, Muriah PSC, South Sesulu PSC, Wokam II PSC, Pekawai Block, and West Yamdena Block.
Selling off the whole portfolio in one deal is unlikely as most of the assets have underperformed. There are also 100% commitments to drill wells at blocks in the Arafura Sea in West Papua, which do not look attractive just now.
Perhaps, the most interesting asset is the Eni-operated producing Muara Bakau Block offshore East Kalimantan. The block owned 55% by Eni, 33.334% by Energie, and 11.666% by Saka, produces gas for the domestic market and liquefied natural gas (LNG) for export.
Pangkah, also in production off East Java, might get some interest too.
Pertamina taking control
Still, it appears Pertamina will exert more control over the direction of Saka as the NOC tightens its grip on PGN.
SOE minister Erick Thohir recently shook up the management of the state gas distributor. On May 3, at the yearly PGN shareholders’ meeting, the company’s stakeholders made some major changes to its board of commissioners and directors.
Thohir appointed Pertamina-friendly commissioners and directors. Most significantly, Haryo Yunianto, previously corporate service director of Pertamina, was hired to spearhead PGN’s management as president director.
While Saka’s fate remains up in the air, it now seems Pertamina will have increasing sway over the future of the embattled company.
Ultimately, somebody must swallow Saka’s financial pain. Most likely PGN or the Indonesian Treasury. Saka’s assets could be sold off individually, although it is hard to imagine any takers for the less desirable parts of the portfolio. Perhaps, it is more likely Pertamina will get its hands on the best bits, or reluctantly take the whole portfolio, but park Saka’s debt at somebody else’s door.
For now, Fitch reports that Saka’s operating profile remains weak, with its proved reserves of 55 million barrels of oil equivalent as of June 2020, resulting in about four to five years of proved reserve life. On a proved plus probable (2P) basis the reserves life stretches to seven to eight years.
“Significant increases in reserve life are contingent on reserve acquisitions, as we assess that Saka’s organic proved reserve replacement is likely to remain well below 1x because it has low probable reserves against proved reserves,” said Fitch.
“Saka is unlikely to make large investments until its ownership structure is finalised. Saka’s production dropped to 25,700 boe per day (boepd) in 9M20 from 34,400 boepd in 2019, as Saka cut production in response to weaker demand amid the coronavirus pandemic and low energy prices. Saka’s earnings derive some stability from the sizable share of earnings from long-term fixed-price gas contracts,” added Fitch.
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