KazMunayGas rating affirmed at ‘BB-‘; outlook stable
S&P Global Ratings said that it has affirmed its ‘BB-‘ long-term corporate credit rating on Kazakhstan’s 100% state-controlled national oil company KazMunayGas NC JSC (KMG) and its core subsidiary KazMunaiGas Exploration Production JSC (KMGEP). The outlooks are stable.
S&P has also affirmed our ‘kzA-‘ national scale rating on KMG.
“The affirmation reflects our view that KMG’s credit metrics will likely improve, owing to the potential upstreaming of KMGEP’s cash to KMG after the minority shareholder buyout, higher oil prices, and the expected completion of key capital expenditure (capex) projects. In addition, we expect the recent extension to 2020-2022 of KMG’s option to buy back a stake in the Kashagan oil project will provide KMG with additional flexibility. Still, as long as the Kashagan option is outstanding, and refinancing or repayment of debt at KMG’s immediate parent, Samruk-Kazyna, remains unresolved, uncertainty over KMG’s financial policy will continue to constrain our assessment of the company’s stand-alone credit profile (SACP) at ‘b’ and the overall rating at ‘BB-‘,” reads the statement.
On Jan. 23, 2018, KMGEP announced that it had received valid acceptance of its tender offer to buy out all outstanding global depositary receipts (GDRs) and that its board unanimously approved the offer to repurchase all of KMGEP’s outstanding common shares. The company expects to complete the minority buyout in March 2018 and subsequently apply to delist KMGEP from the London and Kazakhstan stock exchanges. As a result, KMG’s share in KMGEP could increase to up to 100% from the current 63%. “Previously, we treated KMGEP’s solid cash balances of about $4 billion as not immediately available to service its parent’s debt. Now we estimate that about $2 billion in cash will be used to buy out KMGEP’s minority shareholders, while most of the remaining $2 billion should become available to KMG. We would therefore adjust KMG’s reported debt by deducting this additional surplus cash,” reads the report.
“We expect KMG’s EBITDA will stabilize at about $2.0 billion-$2.2 billion in 2018-2019. In the currently favorable oil price environment, KMG’s mature and relatively high-cost oil production assets are profitable, oil and gas pipeline businesses demonstrate stable performance, and Tengizchevroil LLP (BBB/Stable/–) may pay dividends on KMG’s 20% stake, despite its ongoing capex program. We don’t factor in any material dividend income from KMG’s 8.4% stake in Kashagan before the debt at Kashagan is repaid. We expect KMG’s free operating cash flow (FOCF) will turn positive in 2018-2019, after its key capex projects related to refining and the Beineu-Bozoy-Shymkent gas pipeline are completed. Nevertheless, following several years of negative FOCF, KMG has accumulated over $13 billion of adjusted debt as of Sept. 30, 2017, and continues to provide loans to its immediate parent, government-controlled national welfare fund Samruk-Kazyna, to address amortization of Kashagan-related debt. Therefore, we expect deleveraging will be only gradual, with funds from operations (FFO) to debt at 12%-17% and adjusted debt to EBITDA at 4.5x-5.0x in 2018-2019,” reads the report.
Uncertainty about financial policy remains the key constraint on the rating.
In late 2015, KMG sold 50% of Kashagan B.V. (which owns a 16.88% interest in the world-class Kashagan oil project) to Samruk-Kazyna to temporarily reduce KMG’s reported debt. We understand that, to fund the $4.7 billion asset price, Samruk-Kazyna raised about $2 billion in debt from banks and bondholders, and the rest via a bond issued to Samruk-Kazyna. KMG holds an option to buy this asset back, and we understand the option has been extended to 2020-2022 from 2018-2020, which increases KMG’s flexibility.
