Fitch Affirms TCO Finance Series A Senior Secured Notes at ‘BBB-‘; Outlook Stable


Fitch Affirms TCO Finance Series A Senior Secured Notes at 'BBB-'; Outlook StableFitch Ratings has affirmed Tengizchevroil Finance Company SARL’s (TCO Finance) Series A senior secured notes at ‘BBB-‘. The Rating Outlook is Stable.

The rating affirmation is supported by Tengizchevroil LLP (TCO), the Kazakh oil production company, reaching its scheduled increased output levels. During the first four months of 2010, production has averaged approximately 550,000 barrels of oil per day compared with an average of approximately 375,000 barrels in 2008.

A key risk facing TCO Finance is the continued availability to TCO of sufficient oil transportation capacity at reasonable cost. As crude oil production has increased, the share of deliveries through TCO’s best netback route, the Caspian pipeline (CPC), has fallen to 71% of the total in 2009 from 93% in 2007. During the life of the Series A Notes, the benefit to TCO from the scheduled increase in CPC’s capacity is considered immaterial, as the expansion is not scheduled to be fully operational until 2013, and the Series A notes mature in November 2014. Instead, Fitch assumes that TCO will continue to be reliant on rail and marine transportation for a growing share of deliveries, resulting in higher transportation costs and greater risk of export delays and logistical challenges.

A further key rating consideration for TCO relates to the credit quality of the sovereign (‘BBB-/F3′; Outlook Stable) and the relationship between the state and the project company. Although TCO and TCO Finance are not directly exposed to the credit quality of Kazakhstan and TCO Finance’s rating is not fully constrained by that of the sovereign, the fact that TCO’s operations and oil reserves are based in Kazakhstan means it is unlikely that the Series A Notes would be rated significantly higher than the sovereign at any point in time. At the same time, Fitch notes that, to date, the protections afforded to TCO in its Project Agreement with the Kazakh Government, regarding tax stability and the ability to hold offshore bank accounts and operate in foreign currency, have been honoured. The constructive relationship between TCO and the Kazakh state, Kazakhstan’s stable economic and political climate and the satisfactory improvement in production levels are the primary reasons for the Stable Outlook. Fitch will monitor sales of sulphur, as its accumulation in the past has been a source of disagreement with local Kazakh government.

Fitch’s stress case analysis shows a relatively healthy average debt service cover ratio (DSCR) of 3.66x for the remainder of the life of the notes, using conservative assumptions relating to Brent oil prices (USD50/bbl in 2010, USD47.5/bbl in 2011 and USD45/bbl thereafter), production levels (446,000 bbl/d) and transportation costs (66% of production delivered by rail). Actual production levels have exceeded Fitch’s stress assumptions, and combined with the fact that TCO has been able to use the CPC pipeline more than Fitch had expected, suggest that actual DSCRs may be even higher. Furthermore, Fitch gains comfort from TCO’s USD31/bbl Ural breakeven price. These stress case forecasts support the notes’ ‘BBB-‘ rating.

TCO operates a large oil production and processing complex in western Kazakhstan under an agreement with the Republic of Kazakhstan which lasts until 2033. TCO has been producing over 200,000 barrels of oil per day from the Tengiz and Korolev fields since 2000. The two fields have total gross proven oil reserves in excess of 4bn barrels. Over 90% of TCO’s forecast revenues come from crude oil sales.

TCO Finance issued USD4.4bn of senior secured debt in three tranches in 2004, all of which are amortising, with final maturity in November 2014, and rank equally. The Series A Notes accounted for USD1.1bn of this total senior debt amount. The senior debt has been on-lent to TCO to finance the expansion of production and processing facilities. The expansion project,was designed to increase daily crude oil production to 540,000 barrels, a level which TCO reached in July 2009.