Fitch rates Kazakhstan’s Condensate ‘B-‘; outlook stable

Nov 30. Reuters

Fitch rates Kazakhstan's Condensate 'B-'; outlook stableFitch Ratings has published Kazakhstan’s JSC Condensate (Condensate) Long-term foreign currency Issuer Default Rating (IDR) of ‘B-‘. The Outlook is Stable. A full list of rating actions is at the end of this release.

Condensate is a small, privately owned single-site refinery located in the north-west (NW) Kazakhstan region, with the annual capacity of 600,000 tons of gas condensate. It produces heavy distillate fuel and gasoil. In 2011 it had revenues of KZT36.8bn (USD248m) and EBITDA of KZT9.2bn. It does not currently have any debt, but plans to borrow up to USD160m for a refinery upgrade program. At the same time, competition is likely to increase due to National Company KazMunaiGaz’s (NC KMG, BBB/Stable) upgrade of three Kazakh refineries. Fitch expects that leverage will reach 4x by 2015.


– Small Single-Site Operations

Condensate’s ratings are capped in the mid-to-low B rating category because of its small size and single site operations. Condensate’s refinery has annual refining capacity of 600,000 tons of gas condensate, which mainly produces heavy distillate fuel and gasoil. Its actual refining throughput in 2011 was lower due to the use of crude oil as the primary feedstock. Condensate also owns crude and oil products rail terminals and depots for loading 2,000 m3 of oil products per day and crude and oil products pipelines from the refinery site to the depots. In 2011, Condensate generated revenues of KZT36.8bn, a 73% increase yoy, and EBITDA of KZT9.2bn.

– Diversified Suppliers

Until 2010, Condensate was fully dependent upon Karachaganak Petroleum Operating BV, the operator of the Karachaganak gas condensate field in NW Kazakhstan, for its unstable gas condensate supplies. From 2011, Condensate has purchased its feedstock – crude oil and gas condensate – from Kazakh and Russian oil companies.

– Single Off-Taker

Condensate is also dependent on Great Eastern Oil Limited, a UK company, for almost all its finished products sales. Condensate’s accounts do not list Great Eastern Oil as a related party. However, only very limited detail regarding the control or operations of this company is available, and this lack of clarity weakens Condensate’s credit profile. Nonetheless, the relationship is longstanding. Prior to 2011, Condensate had two offtakers – Milford Haven Trading Limited (UK) and Great Eastern Oil Limited. Milford Haven Trading Limited accounted for 33%, 82%, 87% and 6% of Condensate’s revenues in 2010, 2009, 2008 and 2007 respectively and Great Eastern Oil Limited for 67% and 2% in 2010 and 2009 respectively and 81% in 2007. Fitch considers Condensate’s high customer concentration a key rating constraining factor.

– Increasing Leverage Due to Debt-Funded Capex

Condensate plans to upgrade the refinery to produce Euro-5 quality diesel fuel and gasoline with octane rating of 95 and higher (Phase 1, USD126m) and increase diesel fuel production by 175,000 tons (Phase 2, USD80m), for the total cost of USD206m. This would allow Condensate to improve profitability by increasing sales of higher value-added products (gasoline and diesel fuel with octane rating of 95 and higher) on the local market, which are currently imported from Russia. Condensate estimates that the construction of the Phase 1, which entails installation of pre-fabricated US-made equipment to remove sulphur from finished products, will be completed in Q414; Phase 2 will be completed in Q415. Condensate plans to raise USD160m in debt to finance the refinery upgrade in bank loans from local banks and on bond markets. Based on its conservative rating case assumptions, Fitch expects Condensate’s leverage to increase to about 4x from non-existing levels at end-2011 and coverage in the range of 3x by 2015.

– Intensifying Domestic Competition

State-owned NC KMG is planning to spend USD5.4bn over 2012-2016 upgrading its Atyrau, Pavlodar and Shymkent refineries, Kazakhstan’s three largest. Currently, the Atyrau refinery, the closest to NW Kazakhstan region, produces gasoline with the octane rating of 92 or lower. After the completion of the upgrade program, NC KMG will be producing more value-added products compliant with Euro-4 and Euro-5 quality standards and will be competing more intensely with Condensate’s oil products. Furthermore, while Condensate does not current have a retail presence, NC KMG owns a large retail network in NW Kazakhstan.

– Weak Corporate Governance

Condensate is privately owned and has large related party transactions. Fitch views its corporate governance standards as weaker than that of larger Kazakh and Russian peers.

The rating actions are as follows.

JSC Condensate

Long-term foreign currency Issuer Default Rating (IDR) of ‘B-‘, with a Stable Outlook

Short-term foreign currency Issuer Default Rating of ‘B’

Long-term local currency IDR of ‘B-‘, with a Stable Outlook

National Long-term rating of ‘B+(kaz)’, with a Stable Outlook

Local currency senior unsecured rating of ‘B-‘

National senior unsecured of ‘B+(kaz)’


Positive: Future developments that could lead to positive rating actions include:

– The successful completion of the refinery upgrade programme in 2014-2015. Fitch expects that post upgrade Condensate will generate additional revenues and margins from sales of higher value-added oil products.

– Further clarity about the creditworthiness and ownership of Great Eastern Oil Limited.

Negative: Future developments that could lead to negative rating action include:

– Condensate’s failure to complete or significant delays in completion of the refinery upgrade program that could jeopardise its financial profile.

– Condensate’s FFO gross adjusted leverage at above 4.0x on sustained basis.

– Liquidity problems such as Condensate’s failure to secure and maintain credit facilities to complete the refinery upgrade programme.


– Sufficient Liquidity for Upgrade Phase 1

Currently, Condensate does not have any debt outstanding. In 2011 it repaid its KZT3bn bond in full, ahead of maturity date. Its liquidity at 30 September 2012 was made up of cash balances and short-term deposits of about USD45m. To finance the refinery upgrade, Halyk Bank of Kazakhstan (‘BB-‘/Stable) agreed to provide Condensate with a 7.5-year USD130m credit line for at interest rates of 11% in KZT or 9% in USD, with 2.5 years of grace period. Condensate also has plans to issue KZT bonds.