Fitch Ratings-London/Moscow-03 July 2009: Fitch Ratings has today affirmed Kazakhstan-based KazMunaiGaz National Company's (NC KMG) ratings at Long-term foreign and local currency Issuer Default (IDR) 'BBB-' and 'BBB' respectively, senior unsecured 'BBB-' and Short-term foreign currency IDR 'F3'. The Outlooks for the Long-term IDRs are Negative.
According to Fitch's Parent and Subsidiary Rating Linkage methodology, NC KMG's ratings are aligned with the sovereign ('BBB-'/'BBB'/'F3'/Negative), as the legal, strategic and operational ties between the parent (ultimately the state) and the group are considered to be strong. This is underpinned by the importance of the oil and gas sector to the Kazakh economy and the company's representation of the government's interests in this industry. It also benefits from a favourable operating environment (eg the pre-emptive right granted by the government to acquire interests in oil and gas assets offered for sale in Kazakhstan and to acquire at least 50% in all new offshore projects) and the state's support in negotiations with partners of projects regarding their ownership and funding structures.
The ratings also reflect the group's diversified business operations as a vertically integrated oil and gas company with access to all oil and gas pipeline routes in the country, thus securing its export potential. Nevertheless, despite rapid oil and gas production expansion (5% yoy in 2008), NC KMG still operates on a relatively small scale versus its Russian and international peers, although this is somewhat mitigated by its high oil and gas reserve replacement rate and reserve life.
With a FY08 EBITDAR margin of 38.1% and EBITDA per barrel of oil equivalent of USD40.6, the group compares well with its Russian and international oil and gas peers.
However, the ratings take into account NC KMG's acquisitive strategy and aggressive capex programme of USD23.3bn over 2009-2013, which is likely to adversely affect its leverage. The group's FY08 gross leverage of 1.66x (excluding the Kashagan stake increase and CCEL-related obligations) was already at the high end in the 'BBB-' peer group.
Given that the company widely uses non-recourse funding for the acquisition of equity stakes (50% or less) and/or for investment programmes of projects in which it owns 50% or less (eg the Kazakhstan-China oil and gas pipelines, the West-South pipeline, etc), Fitch believes that the company's shift to the equity accounting method from the proportionate consolidation method with effect from 2009 will more accurately reflect its financial standing. For example, in its analysis of KazTransOil ('BBB-'/Negative), an oil pipeline operator in Kazakhstan, Fitch excludes non-recourse debt pertaining to the funding of the Kazakhstan-China oil pipeline from the gross debt calculation. Based on the equity method and Fitch's base case oil price of USD55/bbl, the agency expects NC KMG's gross leverage to rise to about 2.8x in 2009 (excluding the Kashagan stake increase obligation).
Furthermore, Fitch notes NC KMG's exposure to the weakening Kazakh banking system, which has been negatively impacted by the financial crisis. As a result, Fitch has placed greater emphasis in its analysis on gross leverage rather than net leverage and treated the USD1.3bn held by the group and its subsidiaries at BTA Bank ('RD' - Restricted Default) as restricted cash.