The International Rating Agency S&P Global Ratings affirmed its 'BB' long-term corporate credit ratings on Kazakhstan-government-controlled vertically integrated oil company KazMunaiGas (KMG) and its core subsidiary KazMunaiGas Exploration Production (KMG EP). The outlook is negative. The agency also affirmed 'kzA' Kazakhstan national scale rating on KMG.
“The affirmation primarily reflects our view that KMG will maintain funds from operations (FFO) to debt of about 20 percent on average and solid liquidity over 2017-2018, despite its weak operating performance,” S&P said.
The agency note that the company sold its 50 percent stake in Kashagan, Kazakhstan's largest offshore oilfield, to its shareholder, and paid down bonds with a nominal value of $3.7 billion. Together with other measures, this transaction helped KMG materially reduce debt and improve its liquidity. However, the rating incorporates the high likelihood that KMG buys back the stake in Kashagan.
Also, S&P expects that KMG will continue to receive ongoing and extraordinary support from the government, if needed, as the company is undergoing a transformation and strategic review.
S&P believes that KMG's operating performance will remain weak given the low oil price environment. Notably, the agency forecasts that its largest majority-owned exploration and production company, KMG EP, will generate EBITDA of about $200 million in 2017-2018 versus more than $1 billion in 2014, given its assets are mature and have high break-evens. Furthermore, given the low oil prices, the rating agency thinks that KMG's largest associate Tengizchevroil (where it holds 20 percent stake) will not distribute any dividends in 2017-2018, which further limits KMG's cash flow generation. That said, S&P believes that KMG's subsidiaries KazTransOil and KazTransGas will post robust results, with expected combined EBITDA of about $600 million in 2017-2018. In S&P’s view, these utilities have limited exposure to oil prices.
The negative outlook mirrors that on the sovereign, indicating that a downgrade of Kazakhstan would translate into a similar rating action on KMG, all other factors remaining unchanged. S&P could also lower the rating on KMG if it reassesses the likelihood of government support KMG could receive. This currently appears unlikely.
Downside scenarios beyond factors related to the sovereign appear unlikely. S&P could lower the rating on KMG if its FFO to debt falls below 12 percent due to lower oil prices or if the company takes a more aggressive stance on capital expenditures than the agency currently assumes. S&P expects that KMG will not buy back the 50 percent stake in Kashagan, which it sold to its shareholder Samruk-Kazyna in 2015, earlier than in 2018. The rating on KMG already factors in the impact this buyback might have on the company's leverage. However, if the company were to do so without securing long-term financing, such a transaction could result in a downgrade. Deterioration in the company's liquidity could generally be a risk to its credit quality, although absent this acquisition, the rating agency does not anticipate any liquidity pressure in its base-case scenario.
S&P could revise the outlook on KMG to stable in the event of a similar action on the sovereign.
In the long term, ratings upside will likely hinge on materially higher oil prices than the rating agency currently assumes in its base case. Notably, a positive rating action could materialize if KMG EP starts generating substantial positive cash flows and Tengizchevroil resumes its dividend distributions, which have historically been an important source of KMG's operating cash flow. S&P sees this scenario as unlikely in the next 12-18 months.
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