Baku, Azerbaijan, Nov.6
Fitch Ratings rating agency has assigned final senior unsecured "BBB" rating to the KazMunaiGas National Company JSC (KMG NC; BBB/Stable) bonds in the amount of $500 million due in 2025 with 4.875 percent rate and to the bonds in the amount of $1 billion due in 2044 with 6 percent rate, the agency said Nov.6
The bonds are issued under the medium-term program of KMG NC with a volume of $10.5 billion rated "BBB" by Fitch. The final ratings follow a review of the final bond documentation conforming to the information already received.
The bond rating is in line with KMG NC Issuer Default Rating of "BBB", as the bonds constitute unconditional, unsubordinated and unsecured obligations of the company.
"Wholly state-owned KMG NC is a holding company for Kazakhstan's (BBB+/Stable) interests in the oil and gas sector, and its ratings are notched down once from the sovereign's," the statement said. "We view NC KMG's standalone operational and credit profile as commensurate with the "BB" rating category."
"As NC KMG's main upstream subsidiary is facing declining production, we therefore expect that output growth would come from the group's joint ventures (JVs)," the statement said. "We do not consider the group's significant cash balance of 1,434 billion KZT as of June 30 2014, including short-term deposits, as fully offsetting its high leverage and continue to focus our analysis on gross leverage metrics. We forecast that NC KMG's funds from operations (FFO) gross adjusted leverage will remain around 4x in 2014-2016."
Although NC KMG continues to benefit from strong links with the Kazakh state, the lack of an explicit state guarantee of a significant portion of NC KMG's debt prevents a full rating alignment. Therefore, the group's ratings remain one level down from the sovereign ratings.
"NC KMG's upstream operations are an important contributor to EBITDA and cash flows," the statement said. "In the first half of 2014, the group produced 11.2 million metric tons of oil and 3.5 billion cubic metres of gas. We view a successful launch of Kazakhstan's new oil and gas projects operated by JVs in which NC KMG has a stake as a pre-requisite for the country's hydrocarbons production growth in the medium- to long-term. This is in contrast to JSC KazMunaiGas Exploration Production (KMG EP), NC KMG's majority-owned subsidiary, whose primary goal is to manage production decline from its mature oilfields."
Fitch said that the failed start-up of the colossal Kashagan field in October 2013, in which NC KMG has a 16.88 percent stake, highlights the project development risks inherent in the oil and gas industry, in particular when operating in environmentally sensitive areas and working with high-pressure, high-sulphur reservoirs. As a project partner, NC KMG is responsible for its share of project costs to re-launch Kashagan in 2016 as it currently expects.
The agency expects that dividends from NC KMG's JVs and affiliates will remain its key source of cash over the medium term. In the last 12 months up to June 30 2014, NC KMG received 319 billion KZT in net dividends from JVs and associates, while it generated 295 billion KZT in net cash flows from its consolidated operations. In the last 12 months up to June 30 2014, TengizChevroil LLP (TCO), NC KMG's largest JV by dividend contribution, paid NC KMG dividends of 192 billion KZT, down from 203 billion KZT a year ago. In 2014-2016 lower payouts from TCO are expected due to its large expansion plans, while the total dividend forecast stands at nearly 770 billion KZT over this period.
"Refining and marketing is an important segment for the group," the statement said. "In the first half of 2014, the group's downstream subsidiary KMG RM produced 6.7 million metric tons of oil products. The group is currently undertaking the upgrade of its Atyrau refinery, the country's oldest. In 2014, it also started upgrading its two other refineries in Shymkent and Pavlodar to be completed by end-2016 to ensure that all its oil products are compliant with Euro 4 and Euro 5 emission standards. NC KMG estimates its total investments in downstream projects at nearly $4 billion in 2014-2016."
Although Fitch believes that the accessibility of the group's cash balances held at domestic Kazakh banks has improved since 2009, the group continues to rely on external debt financing for capex funding. Therefore, Fitch doesn't consider NC KMG's significant cash balance of 646 billion KZT plus short-term deposits of 788 billion KZT at end-June 2014 as fully offsetting its high indebtedness and continue to focus our analysis on gross, rather than net, leverage metrics.
"NC KMG's 2 trillion KZT ($11 billion) capex program in 2014-2016 will be partially debt-funded," said the statement "We forecast that the group will continue generating negative free cash flows over this period and estimate that its FFO adjusted gross leverage will fluctuate around 4x over this period. NC KMG's gross coverage and leverage ratios are significantly weaker than those of similarly-rated Russian oil and gas companies."
The agency believes that the positive rating factors are the following: Future developments that may, individually or collectively, result in positive rating action include a sovereign upgrade.
The negative rating factors are the following: Future developments that may, individually or collectively, result in negative rating action include evidence of weakening state support, aggressive acquisitions and/or an investment programme resulting in a further material deterioration of the standalone credit metrics.
As of late June 2014, NC KMG had gross balance sheet debt of nearly 3.1 trillion KZT ($16.9 billion), about 80 percent of which was held by the parent. Its short-term debt of 613 billion KZT ($3.3 billion) is covered by the group's cash of 646 billion KZT and short-term investments of 788 billion KZT on that date. Fitch expects that NC KMG will generate 300 billion KZT in negative free cash flows in 2014-2016, owing to substantial capex. According to NC KMG, it has 300 billion KZT ($1.7 billion) of unused committed credit lines, which supports its short-term liquidity.
"As of June 30 2014, over 90 percent of the group's borrowings were denominated in foreign currencies, primarily USD," the statement said. "As the group reports in KZT, the 19 percent KZT devaluation against the USD in February 2014 contributed to the 0.8x increase in NC KMG's FFO adjusted gross leverage increase to 4.1x at June 30 2014, up from 3.3x at late 2013, as well as a 45 percent increase in debt service costs in the first half of 2014. On the other hand, a weaker KZT will also increase NC KMG's revenue and earnings over time, as USD-denominated sales accounted for 66 percent of total revenues in 2013."