Azerbaijan, Baku, August 2 / Trend /
Standard & Poor's Ratings Services raised its long-term corporate credit rating on Kazakhstan-based oil and gas exploration and production company Zhaikmunai L.P. to 'B+' from 'B'. The outlook is stable.
S&P also raised the issue ratings on Zhaikmunai's senior secured notes to 'B+' from 'B'.
The upgrade reflects our assumption that Zhaikmunai will continue to achieve robust credit metrics in 2013-2014, including funds from operations (FFO) to debt of 40% or higher (2012: 48.6%) and debt to EBITDA below 2x in 2013-2014 (2012: 1.3x). This is based on our base-case scenario that the company will produce about 45,000 boepd (barrels of oil equivalent per day), which is close to full production capacity, and a realized price of no less than $95 per barrel in 2013 and $90 per barrel in 2014. We believe that adjusted EBITDA will be about $500 million in 2013 and between $400 million and $450 million in 2014. We also anticipate that oil prices will remain supportive, the statement said.
S&P "weak" business risk assessment reflects our view of the company's concentrated asset base, its dependence on one pipeline for crude oil and stabilized condensate and one pipeline for dry gas, as well as risks relating to the oil industry and operating in Kazakhstan. These are somewhat mitigated by good profitability, low cash lifting costs, a supportive tax regime, and the part-ownership of its local partner, Kazakhstan-based engineering company KazStroyService. Zhaikmunai acquired three new oil and gas fields in Kazakhstan in the third quarter of 2012, but these will not be producing before 2016.
Zhaikmunai is able to self-fund sizable capital expenditure (capex), which sets it apart from its peers, in our view. Planned capex is at least $300 million in 2013 and $200 million in 2014, including spending on phase two of investment in the new gas treatment facility (GTF). This is likely to lead to neutral or slightly negative free operating cash flows in 2013-2014, the statement said.
S&P expects Zhaikmunai to adhere to its financial policies of maintaining debt to EBITDA at or below 1.5x and paying dividends of about 20% of net income. In November 2012, Zhaikmunai was able to reduce its interest burden, extend debt maturities, and diversify funding sources when it successfully issued $560 million of new senior notes.
Key supporting factors for the rating are the company's good cash flow generation (unrestricted cash on balance sheet was $280 million on June 30, 2013) and its long-dated debt maturity profile. We understand that management aims to maintain a comfortable cash balance during the second GTF investment phase, the statement said.
The stable outlook on Zhaikmunai reflects our expectation of robust credit metrics for the ratings on the back of near full capacity production in 2013 and 2014 of about 45,000 boepd. We anticipate that the company will adhere to its financial targets and we assume neutral or slightly negative FOCF and continued adequate liquidity.
All else being equal, we would consider raising the ratings if Zhaikmunai builds a track record of meeting its financial targets and we receive more information on the shareholders' investment strategy. In addition, greater cushion for liquidity could support the likelihood of an upgrade.
S&P could consider lowering the ratings if Zhaikmunai's production levels become considerably lower than we currently envisage or if we consider that the company's liquidity management or financial policies have become less prudent.