MOODY'S: CREDIT RATING OF KAZMUNAIGAS WILL REMAIN HIGH DESPITE NET DEBT GROWTH

Debt load of KazMunayGas National Company (KMG) will remain within its current rating, despite the company's net debt has grown after it bought out the minorities' share in its subsidiary KazMunayGas Exploration Production (KMG EP), Moody's reports.

"Despite the fact that the consolidation of the minorities' share in KMG EP will lead to KMG's net debt growth, debt load will remain within its current rating. We reckon that KMG's financial indicators will be favorably affected by recovery in oil prices recorded from the beginning of 2016, low tenge exchange rate, as well as the good performance of oil and gas transportation segment and equity accounted associated companies. Costs on purchase of minorities' share in KMG EP will be partially offset by capex cuts starting from 2018. Material liquidity cushion will also have a beneficial effect on the company's credit rating in spite of a significant cash outflow in 2018",- the report author, Moody's Lead CIS Oil and Gas Sector Analyst Denis Perevezentsev says,

By the end of 2018, KMG's debt load will be relieved because of the planned partial debt repayment.

"Debt load indicator, calculated by Moody's as the ratio of adjusted debt to EBITDA, will move down to 4.0 by the end of 2018 (to 4.3 in 2017) as a result of the planned partial repayment of debt and offset of advance payments, which we qualify as liabilities. KMG's Free Cash Flow in 2018 will become negative because of the KMG minorities' share repurchase in in the amount of $ 1.9 billion, which was finished on 5 April 2018, and possible assistance to pay the last tranche of the deferred Kashagan B.V. (KBV) liability in the amount of $ 800 million",- the report stated.

According to calculations of Moody's, capital expenditures will reduce from $ 1.4 billion in 2017 to approximately $ 1.1 billion in 2018 and will fall mainly within the production segment.

"In 2017, KMG spent about $ 700 million (or 36% of its total capital expenditure) on oil and petroleum products refining and sale, but further capital expenditure in this segment will be cut down and in 2018 will be about $ 60 million, which will bring it in line with the contribution of this segment to consolidated EBITDA indicator. Although production segment performance improved in 2017 due to higher oil prices, the contribution of oil and gas transportation segment to cash flow and EBITDA will be significant because of the indexed tariffs", - the report clarified.

KMG's dividend potential capacity in 2018 will be limited as a large-scale capex program should be implemented in its principal associated companies, however, Moody’s is expecting dividend payments in 2019, provided oil prices will remain at least $55 per barrel.

High degree of liquidity will remain despite large payments planned for 2018.

"Cash adjusted by Moody’s and account balance of KMG in the amount of $8.7 billion together with the credit lines opened and cash flow from operations we expect in 2018 ($1.5 billion) will sufficiently cover capex program ($1.1 billion), minorities' share in KMG EP repurchase, scheduled redemption of liabilities and bonds in 2018 ($2.2 billion) and provide $800 million to KBV (KMG Kashagan B.V.) to pay the last tranche of the deferred liability, if this liability is not refinanced by KBV", - Moody’s analysts said.

KazMunayGas is a Kazakh national exploration, production, refining and hydrocarbons transportation operator that represents the government in the oil and gas industry. 90% share is owned by Samruk-Kazyna, 10% - by National Bank of Kazakhstan.