Kazakhstan-based Nostrum Oil & Gas ‘B+’ rating affirmed; outlook stable
April 17. Trend
By Elena Kosolapova
Standard & Poor’s Ratings Services affirmed its ‘B+’ long-term corporate credit rating on Kazakhstan-based hydrocarbons exploration and production company Nostrum Oil & Gas L.P, the rating agency reported on April 17. The outlook is stable.
The agency also affirmed ‘B+’ long-term issue rating on the company’s senior notes.
“We affirmed our ratings on Nostrum because we continue to think that the company will maintain its operational performance on the back of near full capacity production of about 45,000 barrels of oil equivalent per day, and strong credit metrics for the rating over our 2014-2016 forecast horizon,” the rating agency said.
S&P revised the assessment of Nostrum’s financial policies to “neutral” from “negative.” The agency continues to consider Nostrum’s financial policies to be potentially aggressive, which is illustrated by a track record of higher-than-expected dividend payouts and share buybacks.
“However, we no longer see a high risk of these policies affecting the predictability of the company’s credit metrics or depressing key credit ratios over the forecast period, partly because of material cash on hand that we do not net against debt,” the agency said.
In 2014, S&P anticipates adjusted funds from operations (FFO) to debt of 30-45 percent and adjusted debt to EBITDA of about 2x. In 2015, we believe that FFO to debt is unlikely to drop significantly below 30 percent, and adjusted debt to EBITDA is unlikely to rise substantially above 2.5x. The agency forecasts at least $400 million of planned capital expenditures in both 2014 and 2015. This includes some ongoing extensive drilling activities and spending on phase two of investment in a new gas treatment facility (GTF), which should account for almost half of total capital expenditures for 2014-2015. S&P thinks this will result in material negative FOCF of between $100 million and $200 million.
“Weak” business risk profile assessment for Nostrum reflects the view of the company’s concentrated asset base; its dependence on one pipeline for dry gas (the company uses another pipeline for crude oil and stabilized condensate, but it could also use trucks as an alternative); its relatively small operations by international standards; and inherent risks relating to the oil industry and operating in Kazakhstan.
These factors are somewhat mitigated by good profitability (including our assumption of a continued adjusted EBITDA margin of above 55 percent in 2014-2016) on the back of supportive oil prices, a favorable cost structure based on a modern asset base, low cash-lifting costs, and a supportive tax regime.
S&P also views the part-ownership of Nostrum’s local partner, Kazakhstan-based engineering company KazStroyService, as a supporting factor.
“Negative” comparable ratings analysis score is based on the view of the company’s material negative FOCF and high asset concentration relative to that of its peers.
The rating agency would consider raising the ratings if Nostrum’s production increases materially and if the company ramps up phase two of its GTF on time and without major cost overruns. Furthermore, S&P would consider a positive rating action if the company could sustain FFO to debt above 45 percent, with positive FOCF. Additional support for an upgrade would come from enhanced diversification of the producing asset base.
S&P could consider lowering the ratings if Nostrum’s production levels became considerably lower than the agency currently envisages, either because of depletion of fields or operational disruption, leading to FFO to debt of consistently less than 30 percent; or if S&P considers that the company’s liquidity were becoming “less than adequate,” which is not included in the base case. Any political or regulatory changes in Kazakhstan that impaired the company’s taxes or constrained its operations could also lead to negative pressure on the ratings.