01.07.2016, 15:13
Fitch Ratings has affirmed JSC National Company KazMunayGas's
OREANDA-NEWS. Fitch Ratings has affirmed JSC National Company KazMunayGas's (NC KMG) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. Fitch has also affirmed KazMunaiGaz Finance Sub B.V.'s foreign-urrency senior unsecured rating at 'BBB-'. A full list of rating actions is at the end of this release.
We rate NC KMG on a top-down basis one notch below Kazakhstan (BBB/Stable), reflecting its strong links to the Kazakh state. The support factored into this rating includes an expectation that, in addition to the funds provided for the company's debt reduction programme in 2015, the state will over the medium term run NC KMG with a financial profile that gives it some standalone resilience to shocks.
We forecast that in 2016-2017 NC KMG's funds from operations (FFO)-adjusted gross leverage will be above 10x, and if this is sustained we would expect to widen the notching down from the sovereign. We expect management to take clear steps to reduce this leverage over the next year. If by mid-2017 there is no clear path to deleveraging towards 5x then negative rating action - an Outlook revision or downgrade - would be likely.
KEY RATING DRIVERS
Ratings Notched Down from Sovereign
The absence of an explicit state guarantee for a significant portion of NC KMG's debt prevents full rating alignment between Kazakhstan and NC KMG, despite their strong strategic and operational links. Our rating approach is based on the expectation that the state will provide sufficient and timely tangible support to the group when needed.
Support Mitigates Weak Performance
NC KMG's 2015 performance in upstream, downstream and pipeline transportation was weak, mainly due to sharply lower Brent, high costs and lower dividends from joint ventures (JVs). The company's Fitch-calculated EBITDA dropped by 65% and dividends from JVs by about 40%, resulting in negative free cash flow (FCF) of KZT261bn (USD1.2bn) in 2015.
To ensure that NC KMG complies with Eurobond covenants, in 2015 JSC Sovereign Wealth Fund Samruk-Kazyna (BBB/Stable) acquired from NC KMG a 50% interest in KMG Kashagan BV for USD4.7bn. We view this transaction as evidence of the angible state support already incorporated into NC KMG's ratings.
Brent, Costs Hurt Upstream
JSC KazMunaiGas Exploration Production (KMG EP), NC KMG's key upstream subsidiary, which in 2014 accounted for two-thirds of the group's upstream EBITDA, fared extremely poorly in 2015 due to lower Brent and high production costs. Its Fitch-calculated EBITDA collapsed by 99% to a meagre USD3m on average lifting costs of USD13.3 per barrel (bbl) and average netback of USD21.3/bbl.
The average netback dropped to USD11.8/bbl in 1Q16, leading to further deterioration of the group's upstream performance, despite the decline in lifting costs to USD8.4/bbl. We forecast that NC KMG's upstream EBITDA will start improving only from 2017 due to gradually higher Brent of USD45/bbl in 2017 and USD55/bbl in 2018.
Pipelines, Downstream Suffer on Depreciation
The dollar-based financial performance of NC KMG's oil and gas pipelines and downstream suffered in 2015 as well, mainly due to the weaker tenge, but not as badly as that of upstream. In our rating case, we continue to consolidate the group's downstream assets, ie KMG International NV (KMGI, B+/Rating Watch Negative) and domestic Kazakh refineries, despite the announced disposal plans for these and other assets, as we believe it might be difficult to close the asset sales.
JVs' Dividends Decline Materially
We expect dividends from NC KMG's upstream JVs and affiliates to decline materially in 2016-2018 after previously being among the group's key sources of cash. In 2015, NC KMG received KZT173bn in gross dividends from JVs and associates, down 43% from KZT302bn in 2014, mainly from TengizChevroil LLP (TCO).
In 2016-2017, we expect lower payouts from TCO and other JVs due to lower Brent, weaker cash generation and TCO's multi-billion dollar expansion plans (capex estimates are USD35bn-plus). We forecast no dividends from Kashagan over the rating period as NC KMG will start repaying its debt related to the Kashagan acquisition after the project starts commercial oil production, which we assume will occur in 2017.
Debt Reduction, Vitol Prepayments
By end-2015, NC KMG had completed an early partial repayment of Eurobonds (face value of USD3.7bn) and early repayments of nearly USD0.7bn in other external debt following the transaction with Samruk-Kazyna. The group was in compliance with he 3.5x net debt (including guarantees) to EBITDA covenant at year-end.
We view the prepayments of up to USD3bn from Vitol SA for NC KMG's 20% share in TCO oil as neutral for NC KMG's gross leverage as long as the group uses cash to pay down its borrowings. We treat prepayments as debt-like and include them in NC KMG's gross leverage. The company says that NC KMG's liability under the prepayments will not depend on oil prices.
Large Refinery Upgrades Capex
The group is upgrading its domestic Atyrau, Shymkent (a JV) and Pavlodar refineries to ensure compliance with Euro-4 and Euro-5 emission standards by end-2017. NC KMG estimates its total domestic downstream capex at over USD1.8bn in 2016-2017. The 2016-2017 downstream capex may end up lower than projected due to under-funding and delays, as has happened in recent years.
High Gross Leverage Expected
We continue to rate NC KMG on a gross leverage basis because we do not consider the group's significant cash balance at 31 March 2016 of KZT1.5trn, including short-term deposits, to fully offset its high leverage. Historically, the group relied on external debt financing for capex funding. NC KMG's standalone gross leverage and coverage in 2016-2019 are commensurate with those of weak 'B' rating category EMEA oil and gas companies
KMG EP Buyout
In June 2016, NC KMG proposed to buy out the minority stake in KMG EP. We do not incorporate the buyout in our base rating case, but the possible deal would be unlikely to affect NC KMG's rating.
We rate NC KMG on a top-down basis one notch below Kazakhstan (BBB/Stable), reflecting its strong links to the Kazakh state. The support factored into this rating includes an expectation that, in addition to the funds provided for the company's debt reduction programme in 2015, the state will over the medium term run NC KMG with a financial profile that gives it some standalone resilience to shocks.
We forecast that in 2016-2017 NC KMG's funds from operations (FFO)-adjusted gross leverage will be above 10x, and if this is sustained we would expect to widen the notching down from the sovereign. We expect management to take clear steps to reduce this leverage over the next year. If by mid-2017 there is no clear path to deleveraging towards 5x then negative rating action - an Outlook revision or downgrade - would be likely.
KEY RATING DRIVERS
Ratings Notched Down from Sovereign
The absence of an explicit state guarantee for a significant portion of NC KMG's debt prevents full rating alignment between Kazakhstan and NC KMG, despite their strong strategic and operational links. Our rating approach is based on the expectation that the state will provide sufficient and timely tangible support to the group when needed.
Support Mitigates Weak Performance
NC KMG's 2015 performance in upstream, downstream and pipeline transportation was weak, mainly due to sharply lower Brent, high costs and lower dividends from joint ventures (JVs). The company's Fitch-calculated EBITDA dropped by 65% and dividends from JVs by about 40%, resulting in negative free cash flow (FCF) of KZT261bn (USD1.2bn) in 2015.
To ensure that NC KMG complies with Eurobond covenants, in 2015 JSC Sovereign Wealth Fund Samruk-Kazyna (BBB/Stable) acquired from NC KMG a 50% interest in KMG Kashagan BV for USD4.7bn. We view this transaction as evidence of the angible state support already incorporated into NC KMG's ratings.
Brent, Costs Hurt Upstream
JSC KazMunaiGas Exploration Production (KMG EP), NC KMG's key upstream subsidiary, which in 2014 accounted for two-thirds of the group's upstream EBITDA, fared extremely poorly in 2015 due to lower Brent and high production costs. Its Fitch-calculated EBITDA collapsed by 99% to a meagre USD3m on average lifting costs of USD13.3 per barrel (bbl) and average netback of USD21.3/bbl.
The average netback dropped to USD11.8/bbl in 1Q16, leading to further deterioration of the group's upstream performance, despite the decline in lifting costs to USD8.4/bbl. We forecast that NC KMG's upstream EBITDA will start improving only from 2017 due to gradually higher Brent of USD45/bbl in 2017 and USD55/bbl in 2018.
Pipelines, Downstream Suffer on Depreciation
The dollar-based financial performance of NC KMG's oil and gas pipelines and downstream suffered in 2015 as well, mainly due to the weaker tenge, but not as badly as that of upstream. In our rating case, we continue to consolidate the group's downstream assets, ie KMG International NV (KMGI, B+/Rating Watch Negative) and domestic Kazakh refineries, despite the announced disposal plans for these and other assets, as we believe it might be difficult to close the asset sales.
JVs' Dividends Decline Materially
We expect dividends from NC KMG's upstream JVs and affiliates to decline materially in 2016-2018 after previously being among the group's key sources of cash. In 2015, NC KMG received KZT173bn in gross dividends from JVs and associates, down 43% from KZT302bn in 2014, mainly from TengizChevroil LLP (TCO).
In 2016-2017, we expect lower payouts from TCO and other JVs due to lower Brent, weaker cash generation and TCO's multi-billion dollar expansion plans (capex estimates are USD35bn-plus). We forecast no dividends from Kashagan over the rating period as NC KMG will start repaying its debt related to the Kashagan acquisition after the project starts commercial oil production, which we assume will occur in 2017.
Debt Reduction, Vitol Prepayments
By end-2015, NC KMG had completed an early partial repayment of Eurobonds (face value of USD3.7bn) and early repayments of nearly USD0.7bn in other external debt following the transaction with Samruk-Kazyna. The group was in compliance with he 3.5x net debt (including guarantees) to EBITDA covenant at year-end.
We view the prepayments of up to USD3bn from Vitol SA for NC KMG's 20% share in TCO oil as neutral for NC KMG's gross leverage as long as the group uses cash to pay down its borrowings. We treat prepayments as debt-like and include them in NC KMG's gross leverage. The company says that NC KMG's liability under the prepayments will not depend on oil prices.
Large Refinery Upgrades Capex
The group is upgrading its domestic Atyrau, Shymkent (a JV) and Pavlodar refineries to ensure compliance with Euro-4 and Euro-5 emission standards by end-2017. NC KMG estimates its total domestic downstream capex at over USD1.8bn in 2016-2017. The 2016-2017 downstream capex may end up lower than projected due to under-funding and delays, as has happened in recent years.
High Gross Leverage Expected
We continue to rate NC KMG on a gross leverage basis because we do not consider the group's significant cash balance at 31 March 2016 of KZT1.5trn, including short-term deposits, to fully offset its high leverage. Historically, the group relied on external debt financing for capex funding. NC KMG's standalone gross leverage and coverage in 2016-2019 are commensurate with those of weak 'B' rating category EMEA oil and gas companies
KMG EP Buyout
In June 2016, NC KMG proposed to buy out the minority stake in KMG EP. We do not incorporate the buyout in our base rating case, but the possible deal would be unlikely to affect NC KMG's rating.
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