Standard & Poor’s has assigned a GAMMA score of GAMMA-5 to National Company KazMunayGas (NC KMG).
Strengths
Representatives of the parent company, Samruk-Kazyna, and independent directors provide close management oversight. There is a solid board process and independent directors are actively involved in the work of board-level committees. Transparency is moderate overall, yet NC KMG provides audited annual IFRS accounts and makes important disclosures on the web-site. The audit process demonstrates a number of strengths, and a holistic approach to risk management has been adopted.
Weaknesses. In the eyes of Kazakhstan government, NC KMG has a social mission in addition to its commercial goals, and the scope of its social commitments is not clearly defined. In addition to sponsorships, NC KMG has been required on numerous occasions to invest in projects of social importance and holds a number of none-core assets on its balance sheet. The independent directors may not always be able to block such initiatives. There are significant weaknesses in executive compensation policies.
There are several gaps in the disclosure and timing of financial reports is moderate.
Executive Summary
Standard & Poor’s Governance Services assigned its governance, accountability, management, metrics, and analysis (GAMMA) score of ‘GAMMA-5’ to JSC National Company KazMunayGas, an integrated oil and gas company wholly owned by the National Wealth Fund Samruk-Kazyna.
Headquartered in Astana, NC KMG is a holding company that owns equity stakes in a number of operating companies, and through subsidiaries, is involved in the exploration and production of Kazakhstani oil and gas fields, both on- and off-shore. NC KMG holds stakes in the largest domestic product-sharing consortia TengizChevrOil (20%) and Kashagan (16.8%), and also operates domestic oil and gas pipelines, refineries and a network of petrol stations in Kazakhstan and several countries of the European Union and Turkey (through Romanian subsidiary Rompetrol). NC KMG also operates several supporting (‘service’) companies, including a specialised airline, and has recently launched a number of petrochemical projects. The NC KMG group produced 18 million tons of crude oil and 3.8 billion cubic meters of gas in 2008 (consolidated) and has proven consolidated reserves of 701 million tons of oil and 69 billion cubic meters of gas. 2008 consolidated revenues totalled USD21.1 billion, with net income of USD3.2 billion (USD4.9 billion and USD708.3 million for the first six months of 2009 respectively).
Strengths
Representatives of the shareholder and independent directors are highly competent and knowledgeable of the industry. They provide close management oversight and decision-making is consensus based. There is a sophisticated committee structure and independent directors play a leading role on most committees.
Annual IFRS statements are audited by a reputable international auditor, Ernst & Young. The audit committee has an independent majority and is active. The internal audit and risk management procedures are gaining momentum.
NC KMG is the most valuable asset of Samruk-Kazyna, the primary asset management fund for the government of Kazakhstan. The government has been consistent in strengthening various aspects of governance in companies under its control. This includes the appointment of worlds-class independent directors, encouraging transparency and risk management procedures.
The government provides NC KMG with a pre-emptive right on all domestic oil & gas assets and new subsoil licenses.
Weaknesses
The government of Kazakhstan could influence NC KMG to invest in projects of national importance that may lie outside the company’s core area of expertise, such as petrochemicals or overseas projects. Independent directors are in the minority on the board and may not be in position to block these initiatives.
NC KMG often serves as a government policy tool for insuring domestic supplies of affordable oil products, and its domestic downstream operations have a strong social focus.
NC KMG does not have total autonomy in executive compensation policies and strategic process.
NC KMG is effectively a holding company whose operating assets are held by large number of legal entities. A conventional divisional structure is only starting to emerge. NC KMG holds a significant number of non-core assets, which could impede the effectiveness of controls and limit the influence of the board of directors. There are several gaps in disclosure and the timing of financial reports is behind international peers.
Standards and Poors Report 2009
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