Oilcorp Berhad’s (“Oilcorp”) RM70 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes Facility (“MUNIF/IMTN”) long term rating has been downgraded from AID to A-ID, and short term rating reaffirmed at MARC-2ID. The ratings have been accorded stable outlook. The rating downgrade is underpinned by the Group’s weakened financial profile, in particular the continuous deficit in net cash flow from operations due to higher receivables arising from longer milestone in payment terms, sensitive cash flow towards reduction in revenue and operating costs, and the need of additional debt leverage going forward to support its engineering, procurement and construction (“EPC”), property investment and recent involvement in fisheries business activities.

Concern is towards Oilcorp’s net operating cash flow that has remained in deficit since FY2004 arising from higher receivables. Its total receivables had increased from RM165.5 million in FY2005 to RM224.2 million as at 30 September 2006. The difference was primary due to higher amount recorded on contract receivables of RM96.5 mil (FY2005: RM40.2 million). Besides that, the trade receivables had decreased slightly from RM 97.8 million in FY2005 to RM 57.9 mil as at 30 September 2006.

The cash flow projection shows that Oilcorp is sensitive to a 20.0% reduction in revenue with a disproportionate 15.0% reduction in operating costs which may lead to lower DSCR of 1.4 times. Notwithstanding, liquidity risk is addressed through the progressive build up of the FSRA starting from six months before the reduction date for the MUNIF and three months before the maturity date for the IMTN. The first reduction of the MUNIF/IMTN facility shall fall in October 2009.

Oilcorp is also involved in property development, resort operation and property investment. Contributions from the property and resort operation activities have declined in FY2005 but some improvement was shown during the nine month period ended September 2006. The Group’s recent venture to spearhead the national fisheries consortium, Konsortium Perikanan Nasional Berhad (“KPNB”) with a minimum 51% equity stake is expected to provide a stable revenue stream to the Group but contribution from fisheries activity is not expected to be apparent for FY2006.

Debt leverage rose to 1.2 times as at end December 2005 as higher borrowings for its project purposes outstripped the accumulation of retained earnings. Due to the enlarged share capital base arising from a private placement exercise, the debt leverage improved slightly to 1.1 times as at end September 2006. Nevertheless, Oilcorp’s involvement in EPC, property investments and fisheries business will require Oilcorp to gear up accordingly in stages.

For the nine months period ended September 2006, Oilcorp posted a pre-tax profit of RM8.2 million on the back of RM85.0 million in revenue. The group continues to aggressively tender for various new EPC projects to increase the value of its outstanding order book and number of contracts in-hand. The outcome of successful rate in the bidding will be critical towards the Group’s cash flow protection going forward.

Mitigating factors to the above concerns are the healthy growth in various deepwater discoveries and high oil prices that prompted the implementation of many oil and gas projects being planned and to be implemented; and Oilcorp’s position as an integrated, multi-disciplined EPC services provider in various oil and gas, petrochemical, power generation, semiconductor and other related industries. Contracts from the EPC activities contributed to the upward trend in its revenue since FY2001; contributing nearly 87.4% to total revenue in FY2005.