S&P forecasts deterioration of KMG's liquidity
Standard & Poor's Ratings Services affirmed its 'BB+' long-term corporate credit ratings on Kazakhstan-government-controlled vertically integrated oil company KazMunayGas NC JSC (KMG) and its core subsidiary KazMunaiGas Exploration Production JSC (KMG EP).
The outlook is negative, according to the Agency.
The agency also affirmed 'kzAA-' Kazakhstan national scale rating on KMG.
“The affirmation reflects our view that despite weakening credit metrics, KMG's liquidity will not deteriorate due to its manageable debt maturity profile and dividend income from its largest holdings,” said the agency. “However, we now think the likelihood of extraordinary government support is very high, rather than extremely high.”
The agency’s forecast reflects the absence of government support amid the fall in oil prices and substantial capital expenditure (capex), which the company has to finance with debt. It also reflects the lack of progress with regard intragroup mergers/transactions, as KMG still has no access to the almost $4 billion of cash held at its majority-owned subsidiary KMG EP.
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 benefits from vertical integration into pipelines. 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).
Most of KMG's peers have substantially reduced capex amidst the collapse in oil prices, but KMG is not doing so as many of its assets require investments. 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 (such as 20 percent in the Tengizchevroil joint venture and 10 percent in the Karachaganak field).
KMG has not received any meaningful financial support from the government and continues to finance capex with company-level debt. This will significantly weaken its credit metrics, as we forecast a ratio of funds from operations (FFO) to debt of below 12 percent in 2015-2016.
“We assess KMG's liquidity as "less than adequate," based on a ratio of liquidity sources to liquidity needs of less than 1.2x,” said the message of the S&P.
The agency doesn’t include cash held at KMG EP because it might not be fully available for repayment of debt at the parent company. The S&P said that the company's debt maturing in 2015 is covered by available liquidity. At the same time, the agency went on to add that available liquidity sources might not fully cover the full amount of capex that the company might undertake in 2015. That said, the agency thinks the ongoing support from the government and the company's adequate standing in credit markets and with banks, partly offset the risk, as does the availability of financing from the Kazakhstan National Fund.
The agency’s assessment of liquidity as less than adequate also factors in the possible breach of covenants in 2015. However, S&P expects KMG to receive support from the government in various forms to prevent early redemption claims.
The negative outlook on KMG mirrors the outlook on Kazakhstan.
If the S&P were to lower its rating on Kazakhstan, the agency would likely lower the rating on KMG. This is because the uplift it includes in the long-term rating on KMG reflects the agency’s expectation of a "very high" likelihood of government support for the company.
The agency could also lower the ratings if KMG's stand-alone credit profile (SACP) weakens to 'b-', however, this would likely be due to deteriorating liquidity, which the S&P does not expect in its base-case scenario.
The agency would likely revise its outlook on KMG to stable if it made a similar revision to its rating on the sovereign.
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