Medco Energi proposed notes rated BB- as refinancing supports debt profile

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Medco Energi BB- notes refinancing

Highlights

Fitch rates Medco Energi's proposed notes at BB- as direct, unsubordinated obligations, with proceeds earmarked to refinance outstanding U.S. dollar notes.
Medco's acquisition of a 10% interest in four Kutei Basin PSCs is credit neutral, adds reserves, targets closing by end-2026, and increases capex requirements.
Fitch projects EBITDA net leverage to rise to 3.0x by 2028 due to increased capex and moderating Brent prices, but expects it to stay below the 3.3x threshold.

Notes structure and acquisition outlook

As reported by Fitch Ratings, the proposed notes will be issued by Medco Redwood Tree Limited, a wholly owned subsidiary of Medco, and guaranteed by Medco and some of its key subsidiaries. Fitch says the notes are rated at the same level as Medco’s Issuer Default Rating because they will be direct, unsubordinated and unsecured obligations of the group.

Medco plans to use the proceeds to refinance part of its outstanding U.S. dollar notes. Fitch also views Medco’s proposed acquisition of a 10% participating interest in four production sharing contracts in the Kutei Basin as broadly credit neutral, with the deal funded from internal cash and targeted to close by the end of 2026, subject to regulatory approval.

The Kutei assets are mostly gas-producing fields with low cash costs of about USD5 per barrel of oil equivalent. Fitch says the acquisition adds to proven reserves and supports longer-term production growth, although it also brings significant capital expenditure requirements over the coming years.

Leverage, reserves and Indonesia concentration

Fitch estimates Medco’s free cash flow before dividends turns neutral from previously positive levels because of elevated capex linked to the Kutei PSCs over the next three to four years. Combined with a modest decline in EBITDA as Brent prices moderate from 2027 and with ongoing dividend payouts, consolidated EBITDA net leverage rises to 3.0x by 2028, although Fitch expects it to stay below the company’s negative rating sensitivity threshold of above 3.3x.

Fitch says Medco retains flexibility to defer USD250 million to USD300 million of power and exploration capex between 2027 and 2028 if needed to protect its balance sheet. The agency also notes Medco’s reserve base remains smaller than that of similarly rated peers, even though the Kutei acquisition helps maintain reserve life above six years through 2028.

Gas continues to underpin earnings stability, with around 70% of future production expected to come from gas and more than half of those volumes sold under long-term fixed-price contracts with take-or-pay protections. Fitch expects fixed-price contracts to contribute more than a third of oil and gas EBITDA from 2027, helping reduce exposure to oil-price swings.

Including the Kutei PSCs, Fitch expects Medco’s production to exceed 170 mboepd from 2027 and reach about 180 mboepd from 2028 onward. Around 80% of total oil and gas production remains concentrated in Indonesia, with the Corridor Block still contributing more than 35% of total volume over the next three years, although its low cash cost mitigates some concentration risk.

Fitch also highlights leverage in Medco’s power business, where PT Medco Power Indonesia is expected to remain highly geared and may need additional financing for its USD300 million capex plan for 2026 to 2029. At the same time, larger future spending on the Tanzania LNG project and the Bulan solar joint venture could materially lift capex if final investment decisions are reached, though Fitch says Medco’s stake in PT Amman Mineral Internasional Tbk provides a potential source of financial flexibility.

Hainan Rubber’s proposed subordinated perpetual sustainable securities were previously covered in our publication, focusing on how Fitch rated the instruments below the issuer rating due to their junior ranking and coupon deferral features. We also noted Fitch’s support rationale linked to the company’s ties to its state-owned parent, alongside its high leverage profile and liquidity position as it pursues offshore debt refinancing.

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