Fitch Affirms KazMunayGaz at ‘BBB’; Outlook Stable
June 26. Reuters
Fitch Ratings has affirmed JSC National Company KazMunayGas’ (NC KMG or the group) Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook. Fitch has also affirmed KazMunaiGaz Finance Sub B.V.’s foreign currency senior unsecured rating at ‘BBB’. A full list of rating actions is at the end of this release.
Wholly state-owned NC KMG is a holding company for Kazakhstan’s (BBB+/Stable) interests in the oil & gas sector, and its ratings are notched down from the sovereign’s. Fitch views NC KMG’s standalone operational and credit profile as commensurate with the ‘BB’ rating category. Its main upstream subsidiary is facing declining production, and Fitch expects that any output growth would come from the group’s joint ventures (JVs) and associates. Fitch does not view the group’s significant cash balance of KZT468bn plus short-term deposits of KZT618bn at end-Q113 as fully offsetting its high leverage and continues to focus its analysis on gross leverage metrics. The agency forecasts that NC KMG’s funds from operations (FFO) gross adjusted leverage will remain above 4x in 2013-2016.
KEY RATING DRIVERS
Ratings Notched From Sovereign’s Fitch upgraded NC KMG’s Long-term foreign and local currency IDRs in November 2012 to reflect the upgrade of Kazakhstan’s Long-term foreign and local currency IDRs to ‘BBB+’ and ‘A-‘ respectively. Although NC KMG continues to benefit from strong links with the Kazakh state, an explicit state guarantee would be needed for a significant portion of NC KMG’s debt to ensure full rating alignment, in our view. Therefore, we notch the group’s ratings down one notch from the sovereign ratings. Fitch views NC KMG’s standalone operational and credit profile as commensurate with the ‘BB’ rating category.
JVs and Affiliates Drive Production Growth
Fitch considers the continued development of the main oil and gas projects in Kazakhstan operated by NC KMG’s JVs and associates, in which it has equity stakes, as a pre-requisite for production growth in the medium term. This is in contrast to JSC KazMunaiGas Exploration Production, majority-owned by NC KMG, whose primary goal is to arrest natural production decline and maintain stable output levels from its oil fields. Nonetheless, upstream is likely to remain NC KMG’s leading segment by EBITDA and cash flows contribution.
On-going Refinery Upgrade Programme
NC KMG’s Atyrau refinery upgrade is currently on-going. In 2013 the group expects to start upgrading its Shymkent and Pavlodar refineries to be completed by 2016 to ensure that all its products are compliant with Euro 4-5 emission standards. It estimates its total investments in downstream at USD5.2bn by end-2016.
Affiliates’ Dividends Provide Cash
Fitch expects that cash dividends from NC KMG’s JVs and affiliates will remain the main source of operating cash inflows in 2013-2014. In 2012, NC KMG received KZT504bn in dividends from its JVs and associates, up from KZT406bn in 2011, while it only generated KZT94bn in net cash flows from its consolidated subsidiaries. The agency anticipates that TengizChevroil LLP (TCO), NC KMG’s largest affiliate by dividend contribution, will continue paying large dividends despite its expansion plans. In 2012, TCO paid KZT244bn in dividends to NC KMG, a drop of nearly 20% on 2011 levels.
Focus on Gross Leverage
Although we believe that the accessibility of the group’s cash balances held at domestic banks has improved since 2009, the group continues to rely heavily on external debt financing for capex funding. Therefore, the agency does not view the group’s significant cash balance of KZT468bn plus short-term deposits of KZT618bn at end-Q113 as fully offsetting its high indebtedness and continues to focus its analysis on gross, rather than net, leverage metrics. Weaker Financials Than Peers’
NC KMG has a USD15bn capex programme in 2013-2016, and plans to fund half of it with debt. We anticipate that the group will continue generating negative free cash flow until at least 2016. Fitch forecasts that the group’s gross FFO adjusted leverage will remain between 4x and 4.5x in 2013-2016, based on our oil price deck for Brent of USD100/bbl in 2013, USD92/bbl in 2014, USD85/bbl in 2015 and USD75/bbl in the long term. NC KMG compares unfavourably with its similarly-rated Russian oil and gas companies based on its coverage and leverage ratios.
Sovereign Rating Action and/or Support
NC KMG’s ratings would be affected by a sovereign rating action. A sovereign upgrade or a downgrade of Kazakhstan would be replicated for NC KMG with a one-notch differential.
Aggressive Acquisitions and/or Capex
Aggressive acquisitions and/or an investment programme resulting in a further material deterioration of the standalone credit metrics could be negative for NC KMG’s ratings.
Sovereign Rating Support Evidence of weakening state support would also be negative for NC KMG’s ratings.
LIQUIDITY AND DEBT STRUCTURE
Refinancing Risk Mitigated in 2013
At end-2012, NC KMG had about USD3.9bn in short-term debt. In April 2013, it placed 4.4% USD1bn notes due in 2023 and 5.75% USD2bn notes due in 2043 under its USD10.5bn medium-term programme rated ‘BBB’ by Fitch. We expect the group to refinance the next spike in debt maturities that falls on 2015. Satisfactory Liquidity
We view the group’s liquidity as sufficient. We consider its large cash balances and deposits, assuming the full accessibility of funds, as positive for its liquidity. NC KMG also maintains a USD4bn undrawn credit line from the National Fund of Republic of Kazakhstan, of which USD2.5bn expires in 2013 and USD1.5bn – in 2015.
The rating actions are as follows.
Long-term foreign currency IDR: affirmed at ‘BBB’; Outlook Stable
Long-term local currency IDR: affirmed at ‘BBB+’; Outlook Stable
Short-term foreign currency IDR: affirmed at ‘F3’
Foreign currency senior unsecured rating: affirmed at ‘BBB’
Local currency senior unsecured rating: affirmed at ‘BBB+’
KazMunaiGaz Finance Sub B.V.
Foreign currency senior unsecured rating: affirmed at ‘BBB’