Fitch affirms EP KMG, outlook stable

July 13. KASE

Fitch affirms EP KMG, outlook stableFitch Ratings has affirmed Kazakhstan-based JSC KazMunaiGas Exploration Production’s (KMG EP) Long-term foreign and local currency Issuer Default ratings (IDR) at BBB-‘ respectively, and its Short-term foreign currency IDR at ‘F3’. The Outlooks for the Long-term IDRs are Stable.

Fitch continues to rate KMG EP on a standalone basis although its ratings are capped by those of its majority shareholder – KazMunaiGaz National Company (NC KMG; ‘BBB-‘/Stable) – given the increasing linkage between the parent and its subsidiary. The linkage is demonstrated by KMG EP’s agreement to purchase KZT220bn (USD1.5bn) bonds to be issued by NC KMG, in a move to support the parent company’s liquidity.

Fitch believes that KMG EP’s strong financial profile provides sufficient headroom to absorb this transaction without a negative impact on its financial standing. Nevertheless, the agency would consider continuous and substantial financial support by KMG EP to its parent as detrimental to the former’s credit metrics.

KMG EP’s ratings reflect the company’s greater ability to maintain solid credit metrics compared with its peers, despite a less favourable industry environment in 2009. Its 2009 EBITDAR margin was 50% and funds from operations-adjusted (recourse) leverage was only 0.05x. Fitch expects the company’s financial profile to remain strong in 2010 due to improved industry conditions. KMG EP’s recourse debt (excluding PetroKazakhstan-related non-recourse debt) was low at KZT8.7bn (USD58.6m) at end-2009.

Fitch views the company’s sound financial standing as a mitigating factor to its less favourable business profile compared with its Russian oil and gas peers (eg small scale of operations, relatively low reserve life, and production costs at the higher end of the peer group).

Although the domestic banking system has started to show signs of stabilising, KMG EP remains exposed to the risks inherent in this system. Hence the agency continues to treat its cash position at BTA Bank (‘Restricted Default’) as restricted and to place greater emphasis in its analysis on gross leverage-related ratios rather than net figures.