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Standard & Poor's Ratings Services lowered its long-term corporate credit ratings on Kazakhstan-government-controlled vertically integrated oil company KazMunaiGas (KMG) and core subsidiary KazMunaiGas Exploration Production (KMG EP) to 'BB+' from 'BBB-', the rating agency reported on February17. The outlook is negative.

At the same time, the agency lowered the Kazakhstan national scale rating to 'kzAA-' from 'kzAA'.

“The rating actions follow the downgrade of Kazakhstan on Feb. 9, 2015. The downgrade reflects KMG's status as a government-related entity with an "extremely high" likelihood of receiving government support if in need. We therefore incorporate four notches of uplift into the long-term rating,” S&P said.

KMG is a 100-percent government-owned national oil company with stakes in essentially all of Kazakhstan's oil-related assets and priority access to new assets, which also benefit from vertical integration into pipelines.

S&P views KMG's role in the country's economy as "critical." In its view, if KMG were to default, this would have strong negative implications for the government of Kazakhstan and for other government-related entities in the country. KMG holds stakes in all significant oil operations in Kazakhstan. It is one of the country's largest exporters and taxpayers and has some social mandates such as supplying the local market with fuel at fairly low prices and investing in socially important projects. Still, KMG is responsible for only about 28 percent of the country's oil production (12 percent if only majority-owned operations are included).

The rating agency views KMG's link to the Kazakhstan government as "very strong" because the government and political support have helped KMG obtain attractive financing terms for its investments in the past, including refinery upgrade projects and a number of acquisitions. The government's large liquidity reserves and low debt underpin its ability to support KMG. At the same time, KMG's strong links with the government put pressure on its stand-alone credit profile (SACP) because most of its capital expenditure and acquisitions reflect its role as a national champion in the oil and gas sector, but were financed with company-level debt.

Most of KMG's majority-owned oil production assets are mature and lack growth prospects, its refineries are relatively old, and the company only has minority stakes in the country's most profitable and young oil projects (in TengizChevroil and in Karachaganak), according to S&P. At the same time, KMG's debt is relatively large compared with the size of Kazakhstan's economy. This puts further pressure on the company's credit profile.

The negative outlook on KMG mirrors the outlook on Kazakhstan.

If S&P was to lower its rating on Kazakhstan, it expects to lower the rating on KMG. This is because of the uplift the agency includes in the long-term rating on KMG to reflect the expectation of an "extremely high" likelihood of government support for the company.

The rating on KMG has a substantial margin of safety against any gradual deterioration in the company's stand-alone performance. Pressure on the rating could emerge only if KMG's SACP were to deteriorate to 'ccc+', such as in the event of extremely tight liquidity. However, this is not the base-case scenario.

S&P would likely revise the outlook on KMG to stable following a similar outlook revision the sovereign rating.

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