Daily Brief Energy/Materials: Warrego Energy, Indika Energy, Lyondellbasell Indu Cl A and more

• After the Gina Reinhart-backed Hancock bumped its Offer for Warrego Energy (WGO AU) to A$0.28/share, in cash, Beach Energy (BPT AU) declined to match the revised Offer.  
• With Hancock seemingly in the driver’s seat, Strike Energy (STX AU), with 19.9% of shares out, proposed a one-for-one scrip Offer, with an indicative price of A$0.335/share.
• Hancock has responded that its Offer provides certainty, with cash, whereas Strike’s proposal does not. Now 15.84% of the register has come out in support of Hancock’s Offer.

We view Indika Energy as “Medium Risk” on the LARA scale, thanks to its robust balance sheet following the December 2017 acquisition of a controlling stake in PT Kideco Jaya Agung (to 91%) at a low price. We note favourably Kideco’s position as the third-largest coal producer in Indonesia, as well as the low-cost structure (first quartile; profitable even during the coal downturn in the past few years). It is one of the few HY coal credits that survived the downturn. Indika’s balance sheet appeared to be fairly levered in the past, as debt-free Kideco had not been consolidated. However, the balance sheet was transformed by the stake acquisition. The business profile also changed from that of an energy (primarily coal) services company to that of an integrated coal producer. The balance sheet is now robust, with a net cash position. In the medium term, Indika is diversifying away from coal by acquiring and investing in non-coal businesses.

Our fundamental Credit Bias on Indika is “Positive”. This is based on: [1] the strong rally in coal prices, which should further boost the company’s financial risk profile in FY 2022; and [2] Indika’s commitment to improving its business diversification and ESG standards.

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”.

We revise our recommendation to “Hold” on the INDYIJ notes from “Buy” on the INDYIJ 8.25 25.

• LyondellBasell has become a business worth considering for anyone looking for relatively safe and high dividend yield in 2023.
• Lower margins in key segments are largely priced-in as management prepares to reduce capacity.
• Strong cash flow positioning and recent deleveraging efforts have significantly reduced risks related to future dividend payouts.