S&P affirms Kazakh KazMunaiGas ‘BBB-/kzAA’ ratings; outlook stable

April 22. Trend

By Elena Kosolapova

S&P affirms Kazakh KazMunaiGas 'BBB-/kzAA' ratings; outlook stableStandard & Poor’s Ratings Services affirmed its ‘BBB-‘ long-term corporate credit rating on Kazakhstan’s National Oil And Gas Company KazMunaiGas (KMG), the rating agency reported on April 22. The outlook is stable.

At the same time, the agency affirmed the ‘kzAA’ Kazakhstan national scale rating on the company.

“The affirmation reflects our unchanged assessments of KMG’s stand-alone credit profile (SACP) at ‘b+’ and the likelihood of extraordinary government support as “extremely high.” KMG’s financial risk profile has been improving, and we now assess it as “aggressive,” from “highly leveraged” previously,” S&P said.

Still, the agency thinks that KMG’s future financial performance is subject to uncertainties, such as the commissioning of the Kashagan field and the return on KMG’s investments in refinery modernization. These uncertainties cannot be reliably captured in base case. Therefore, S&P now assigns a “negative” financial policy modifier of minus one notch. The agency believes that at ‘b+’, KMG’s SACP assessment compares well with those of other entities and, therefore, the comparable ratings analysis is “neutral.”

The stable outlook reflects the expectation that KMG will continue to benefit from an “extremely high” likelihood of extraordinary government support. It also reflects the stable outlook on the sovereign.

Rating upside could stem from KMG’s SACP improving to ‘bb-‘. This could happen if KMG benefits from successful implementation of its large investments (notably if Kashagan starts generating cash), avoids large debt-financed acquisitions, and keeps at least “adequate” liquidity. An upgrade could also follow from materially improving credit metrics (with FFO to adjusted debt consistently above 30 percent), improving free cash flow generation, and KMG managing to lower its debt via equity contributions from the government or reducing its large cash balances. In addition, the agency could upgrade KMG if it upgrades the sovereign, if its view on the likelihood of extraordinary support remains unchanged.

S&P might consider a negative rating action if KMG’s SACP deteriorated to ‘ccc+’, as a result, for example, of heavy liquidity pressure, although the agency views this as very unlikely. Also, S&P could lower the rating on KMG if it lowered the sovereign local currency rating, or if it saw that the government’s stance toward KMG was no longer consistent with an “extremely high” likelihood of support. This could happen if the government reduces its stake in KMG via an IPO and if it loosens KMG’s links with the government, which is not the base-case scenario at the moment.