Fitch Ratings Affirms KazMunayGas at ‘BBB’ with Stable Outlook 1

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ASTANA – International rating agency Fitch Ratings has affirmed National Company KazMunayGas’s (NC KMG) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook, according to a June 30 press release.

“We rate National Company KazMunayGas on a top-down basis one notch below Kazakhstan (BBB/Stable), reflecting its strong links to the Kazakh state. The support factored into this rating includes an expectation that, in addition to the funds provided for the company’s debt reduction programme in 2015, the state will over the medium term run NC KMG with a financial profile that gives it some standalone resilience to shocks,” the Fitch Ratings press release stated.

Fitch stressed that the rating approach is mainly based on the expectation that Kazakhstan “will provide sufficient and timely tangible support to the group when needed,” adding that “the absence of an explicit state guarantee for a significant portion of KazMunayGas’s debt prevents full rating alignment between Kazakhstan and NC KMG, despite their strong strategic and operational links.”

“NC KMG’s 2015 performance in upstream, downstream and pipeline transportation was weak, mainly due to sharply lower Brent, high costs and lower dividends from joint ventures. The company’s Fitch-calculated EBITDA (earnings before interest, taxes, depreciation and amortisation) dropped by 65 percent and dividends from joint ventures by about 40 percent, resulting in negative free cash flow (FCF) of 261 billion tenge (US$1.2 billion) in 2015.”

Fitch forecasts that the company’s upstream EBITDA will start growing only from 2017 due to Brent prices rising to $45 per barrel in 2017 and $55 per barrel in 2018.

The acquisition of KazMunayGas’s 50 percent stake in Kashagan BV by the Samruk Kazyna Sovereign Wealth Fund was assessed by Fitch as “evidence of the tangible state support already incorporated into NC KMG’s ratings.”

Fitch also forecasts that in 2016–2017, the company’s “funds from operations (FFO)-adjusted gross leverage will be above 10x, and if this is sustained we would expect to widen the notching down from the sovereign. We expect management to take clear steps to reduce this leverage over the next year. If by the middle of 2017 there is no clear path to deleveraging towards 5x then negative rating action – an Outlook revision or downgrade – would be likely.”

In 2016–2017, lower payouts from Tengizchevroil (TCO) and other joint ventures are expected due to lower Brent, weaker cash generation and TCO’s multi-billion dollar expansion plans. “We forecast no dividends from Kashagan over the rating period as NC KMG will start repaying its debt related to the Kashagan acquisition after the project starts commercial oil production, which we assume will occur in 2017,” said the press release.

Fitch’s key assumptions regarding the rating include that Brent oil prices will be $35 per barrel in 2016, $45 in 2017, $55 in 2018 and $65 thereafter; that the exchange rate will be 360 tenge per dollar in 2016, 340 tenge in 2017, 320 tenge in 2018 and 300 thereafter; as well as stagnant oil and gas production, no dividends from Kashagan in 2017–2019 and no significant asset disposals in 2016–2019.



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