Nostrum Oil and Gas Affirmed At ‘B’ On Expected Completion Of Gas Treatment Facility; Outlook Stable

Kazkommertsbank Says Standard & Poor's Placed Bank's Ratings on CreditWatch "Developing"

NEW YORK (S&P Global Ratings) March 24, 2017–S&P Global Ratings today
affirmed its ‘B’ long-term corporate credit rating on Nostrum Oil and Gas PLC,
a hydrocarbons exploration and production company that operates in Kazakhstan.
The outlook is stable.

We also affirmed our ‘B’ long-term issue rating on the company’s senior
unsecured notes issued by Nostrum’s subsidiary Zhaikmunai LLP, which are
guaranteed by all the group’s entities.

The affirmation reflects our view that Nostrum will be able to complete its
major investment project, the construction of the GTU3 gas treatment facility,
later in 2017 without raising additional funds or facing liquidity pressure.
We think that free operating cash flow (FOCF) will continue to be negative
this year, on the back of these heavy investments, but it might turn positive
as early as 2018, provided that the facility comes online, thereby increasing
production volumes. The affirmation also incorporates our view that the
company will maintain adequate credit metrics for the rating in 2017-2018,
with funds from operations (FFO) to debt of 12%-20% and debt to EBITDA of
about 4.0x-4.5x.

The $498 million GTU3 investment project is scheduled to be completed in the
second half of 2017. This project has already been fully funded and we
estimate it will not require additional borrowings this year. Once online, the
GTU3 facility will contribute to Nostrum’s growth of production to potentially
more than 80,000 barrels of oil equivalent per day (boepd) by 2019, from
40,000 boepd on average in 2016. At the same time, we note that this project
is subject to execution and cost overrun risks.

Our assessment of Nostrum’s business risk profile as weak reflects our view of
the company’s fairly concentrated asset base and its dependence on one
pipeline for dry gas–the company uses another pipeline for crude oil and
stabilized condensate, and it could also use trucks as an alternative for oil
transportation. We also take into account its relatively small-scale
operations by international standards and the inherent risks relating to the
oil industry and operating in Kazakhstan, where we assess the country risk to
be high.

These factors are mitigated by good profitability (including our assumption of
a continued adjusted EBITDA margin of about 50%-55% in the next two years),
with a favorable cost structure based on a modern asset base, low cash lifting
costs, and a supportive tax regime. In our view, Nostrum’s relatively low
break-even costs, as well as our anticipation that its production profile will
improve materially from the end of 2017, are important advantages compared
with peers. This is reflected in our positive comparable ratings analysis
score.

The stable outlook on the company reflects our view that Nostrum will maintain
credit measures that are commensurate with the rating over 2017-2018, with FFO
to debt of 12%-20% and debt to EBITDA of 4.0x-4.5x, thanks to low operating
costs, a material production increase from the second half of 2017 when the
GTU3 facility is launched, and prudent financial policies, as well as the
absence of debt maturities until 2019.

Pressure on the ratings might arise if:

  • Nostrum experiences delays in completion of the GTU3 plant or suffers from project cost overruns leading to, for instance, raising debt not aimed at refinancing;
  • The company’s cash position deteriorates below $50 million, resulting in squeezed liquidity (and also potentially indicating higher-than-expected costs to complete the GTU3);
  • There are operating or macroeconomic issues or heightened investments or dividend payments, resulting in sustainably weakened credit metrics, notably FFO to debt remaining below 10% or debt to EBITDA exceeding 5x; or
  • Nostrum does not have a tangible plan to address the 2019 maturities (when both bonds totaling $960 million representing total Nostrum’s debt are due) by the end of 2017.

We might consider a positive rating action if we foresaw an improvement in
credit measures such that Nostrum’s FFO to debt remained comfortably above 20%
for a sustained period. This could occur on the back of a supportive
oil-pricing environment or quicker GTU3 production ramp-up. We would also have
to see no liquidity issues and have evidence of a plan to address the 2019
maturities.

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