Fitch release on KazMunaiGaz National Company

energy

Fitch release on KazMunaiGaz National Company

By SRI ⋅ August 25, 2008 ⋅

August 22, 2008 - Fitch Ratings has affirmed Kazakhstan-based KazMunaiGaz National Company’s RDGZ.KZ (NC KMG) ratings at Long-term foreign and local currency Issuer Default rating (IDR) ‘BBB’, senior unsecured ‘BBB’ and Short-term foreign currency IDR ‘F3′. The Outlooks for the Long-term IDRs are Negative.

Fitch utilizes its criteria “Parent and Subsidiary Rating Linkage” (available from www.fitchratings.com) to assess NC KMG’s ratings which are aligned with its parent’s rating, the Kazakhstan sovereign (’BBB’/Negative Outlook). The group, as a wholly state-owned enterprise, was established to represent the interests of the government in Kazakhstan’s oil and gas industry. State support is clearly evident in NC KMG’s pre-emptive right for the acquisition of stakes in oil and gas companies offered for sale in the domestic market, as well as its right to acquire at least a 50% interest in all new offshore projects in Kazakhstan.

The ratings also reflect NC KMG’s diversified operations through the group’s involvement in upstream, midstream and downstream businesses, which help to cushion the impact of volatile oil and gas prices on cash flow. However, it should be noted that the group’s business is still geared towards the exploration and production segment, with crude oil sales accounting for 64.2% of FY07 revenue.

Additionally, the ratings are supported by the relatively solid credit metrics of the company with a FY07 EBITDAR margin of 48.8% and net leverage of 0.6x. Based on these measures, the company is favourably positioned compared with both Russian and international oil and gas peers.

NC KMG also controls 100% of the gas transportation network and 75% of the crude oil transportation network on Kazakhstani territory, which enables it to secure transportation contracts for oil and gas within the country and for export.

Furthermore, the ratings incorporate NC KMG’s acquisition-driven growth strategy, with M&A activities in excess of USD5bn during 2006-H108 and an intensive investment programme of USD29.1bn planned for 2008-2012, the implementation of which is expected to result in a surge of gross leverage to about 3x in 2008-2009. However, in Fitch’s view, there is a limited number of attractive onshore acquisition targets in Kazakhstan and thus the group’s growth prospects are likely to be associated with the successful development of offshore fields (ie Kashagan) and/or acquisitions outside Kazakhstan.

While NC KMG has the largest operations in its domestic market, the ratings also take into account the company’s relatively small scale of operations compared with its international and Russian peers (FY07 oil and gas production of 362 kboepd).

The Negative Outlook reflects that of the sovereign rating, which was assigned on 17 December 2007.

(The statement was released by the ratings agency.)