Fitch Publishes KazMunayGas’ Notes ‘BBB-‘ Rating

Fitch Rates Kazakhstan's Real Estate Fund Samruk-Kazyna 'BB+'; Outlook Stable

Fitch Ratings has published a foreign currency senior unsecured rating of ‘BBB-‘ to JSC National Company KazMunayGas’ (NC KMG, BBB-/Stable) USD500 million notes due 2022, USD1 billion notes due 2027 and USD1.25 billion notes due 2047. The notes are issued under NC KMG’s USD10.5bn medium term programme, rated ‘BBB-‘ by Fitch.

The bond rating is in line with NC KMG’s Issuer Default Rating of ‘BBB-‘, as the bonds constitute unconditional, unsubordinated and unsecured obligations of the company.


Ratings Notched Down from Sovereign
We rate NC KMG one notch below Kazakhstan (BBB/Stable), reflecting their strong strategic and operational linkage as well as the absence of an explicit state guarantee for a significant portion of NC KMG’s debt. The support factored into this rating includes an expectation that, in addition to the funds provided for the company’s debt reduction programme in 2015, over the medium term the state will manage NC KMG with a financial profile that gives it some standalone resilience to oil price shocks.

Performance Better on FX, Costs
NC KMG’s performance improved in 2016, partially due to tenge depreciation and cost optimisation and despite weaker average oil prices. The company’s Fitch-calculated EBITDA increased to KZT594 billion, up from KZT197 billion in 2015. Free cash flow (FCF) remained below zero in 2016, although it improved to negative KZT178bn from negative KZT261bn in 2015. Fitch calculates that NC KMG’s funds from operations (FFO) adjusted gross leverage was at 7.3x at end-2016, above Fitch’s mid-term negative rating guidance but lower than our previous forecasts.

Weaker Tenge Boosts Upstream
JSC KazMunaiGas Exploration Production (KMG EP), NC KMG’s key upstream subsidiary, fared better in 2016 due to a weaker tenge, as most of its costs are tenge-denominated. Its FFO improved to KZT178 billion from negative KZT5 billion in 2015 on average lifting costs of USD9.3 per barrel (bbl), down 30% yoy, and average netback of USD21.3/bbl.

Downstream and Midstream Improves
The dollar-denominated financial performance of NC KMG’s oil and gas pipelines and downstream, including international operations, improved in 2016 as well. In our rating case, we continue to consolidate the group’s downstream assets, ie KMG International NV (KMGI, B+/Rating Watch Negative) and domestic Kazakh refineries, despite the announced disposal plans for these and other assets, as we believe it might take longer to close the asset sales.

JVs’ Dividends Below Historical
In 2016, NC KMG received KZT119 billion in gross dividends from JVs and associates, down 31% yoy. Chevron Corp.-led TengizChevroil LLP (TCO), in which NC KMG has a 20% stake, paid nil dividends to the company in 2016, after paying KZT89 billion in 2015, following an announced USD37 billion expansion. In 2013-2015, cash dividends from TCO to NC KMG reached nearly USD3.1 billion and were an important source of cash for NC KMG.

On 1 November 2016, Kashagan began commercial oil production and produced 1 million tonnes of crude by end-2016. We forecast no dividends from Kashagan over the rating period as KMG Kashagan B.V., NC KMG’s 50% associate holding 16.89% interest in the project, will continue repaying its USD1.6 billion outstanding debt related to the Kashagan acquisition.

Large Refinery Upgrades Capex
The group is continuing upgrading Atyrau, Shymkent (a JV) and Pavlodar refineries to ensure compliance with Euro-4 and Euro-5 emission standards by end-2017. NC KMG estimates its total domestic downstream capex at KZT253 billion in 2017, on top of KZT498 billion spent in 2014-2016, and a sharp decline to mere KZT10 billion starting in 2018.


NC KMG is Kazakhstan’s national oil and gas production and refining company and the owner of trunk oil and gas pipelines. It has sizable upstream production and large stakes in the country’s largest upstream projects such as Tengizchevroil (TCO), Karachaganak and Kashagan. With 2016 production of nearly 250 thousand barrels of oil equivalent per day (mboepd), or 580mboepd including JVs, it fares well with such peers as PJSOC Bashneft (BB+/RWE, around 430mboepd), State Oil Company of the Azerbaijan Republic (SOCAR, BB+/Negative; around 250mboepd including JVs) and Repsol, S.A. (BBB/Negative; around 680mboepd including JVs) in terms of oil and gas production volume. NC KMG’s gross leverage is significantly higher than that of similarly rated EMEA peers.
NC KMG’s rating is notched down one notch from the sovereign rating due to strong strategic and operational ties on one hand and weak legal ties (e.g., absence of state guarantees for the company’s debt) on the other.


Fitch’s key assumptions within our rating case for the issuers include:
– Brent oil price of USD52.5/bbl in 2017, USD55/bbl in 2018, USD60/bbl in 2019 and USD65/bbl thereafter.
– Average USD/KZT exchange rate of 324 in 2017 and 310 thereafter.
– Stagnant oil and gas production and no dividends from Kashagan in 2017-2020.
– No significant asset disposals in 2017-2020.


Positive: Developments that may, individually or collectively, result in positive rating action include:
– A sovereign upgrade.

Negative: Developments that may, individually or collectively, result in negative rating action include:
– A sovereign downgrade.
– Failure to improve the standalone credit metrics to those commensurate with a mid ‘B’ rating category oil and gas company, e.g. FFO-adjusted gross leverage of around 5x over the medium term.
– Evidence of weakening state support, i.e. the state’s failure to provide timely tangible financial support to the company.

For the sovereign rating of Kazakhstan, the following sensitivities were outlined by Fitch in its rating action commentary of 28 October 2016:
The following risk factors individually, or collectively, could trigger negative rating action:
– Policy mismanagement or prolonged low oil prices leading to a further weakening in the sovereign external balance sheet.
– Materialisation of significant contingent liabilities from the banking sector on the sovereign balance sheet.

The following factors, individually or collectively, could result in positive rating action:
– A sustained recovery in external and fiscal buffers.
– Steps to reduce the vulnerability of the public finances to future oil price shocks, for example, by reducing the non-oil deficit.
– A sustained recovery in the economy supported by substantial improvements in the business climate and governance and greater diversification.


Manageable Maturities, US Debt
At end-2016 the group’s short-term debt of KZT616 billion, including the short-term portion of oil supply prepayment, was fully covered by cash of KZT903 billion and short-term investments of KZT1,183 billion, including cash attributable to discontinued operations. According to NC KMG, it has around USD1.6bn in unused credit lines at 31 December 2016, which supports its short-term liquidity. The recently issued Eurobonds totalling USD2.75bn can be used on general corporate purposes, and we expect NC KMG to apply the proceeds mostly to refinancing its existing debt.

At end-2016, around 93% of the group’s borrowings were denominated in US dollars.

Additional information is available on