S&P affirms National company KazMunayGaz ratings; outlook Stable

/Standard & Poor's, Moscow, April 21, 14, heading by KASE/ – Standard & Poor's Ratings Services affirmed its 'BBB-' long-term corporate credit rating on Kazakhstan's government-controlled vertically integrated oil company KazMunayGas NC JSC (KMG). The outlook is stable. At the same time, we affirmed the 'kzAA' Kazakhstan national scale rating on the company. The affirmation reflects our unchanged assessments of KMG's stand-alone credit profile (SACP) at 'b+' and the likelihood of extraordinary government support as "extremely high." KMG's financial risk profile has been improving, and we now assess it as "aggressive," from "highly leveraged" previously. Still, we think that KMG's future financial performance is subject to uncertainties, such as the commissioning of the Kashagan field and the return on KMG's investments in refinery modernization. These uncertainties cannot be reliably captured in our base case. Therefore, we now assign a "negative" financial policy modifier of minus one notch. We believe that at 'b+', KMG's SACP assessment compares well with those of other entities and, therefore, the comparable ratings analysis is "neutral." We view KMG's business risk profile as "fair." This reflects the company's position as the national champion with stakes in essentially all oil ventures in the country. The rating continues to reflect our expectation of the "extremely high" likelihood of timely and sufficient extraordinary government support to KMG, based on KMG's "critical role" for and "very strong" links with the government, as defined in our criteria for rating government-related entities (GREs). KMG is the government's key tool in the strategic oil and gas industry. In our view, if KMG were to default, it would have a very negative reputational impact on the government and other GREs. We consider that the Kazakh government, via its umbrella holding company and KMG's parent, Samruk-Kazyna, is closely involved in strategic decision-making for KMG, but KMG has an autonomous management team and mostly finances itself at the corporate level. The stable outlook reflects our expectation that KMG will continue to benefit from an "extremely high" likelihood of extraordinary government support. It also reflects the stable outlook on the sovereign. Rating upside could stem from KMG's SACP improving to 'bb-'. This could happen if KMG benefits from successful implementation of its large investments (notably if Kashagan starts generating cash), avoids large debt-financed acquisitions, and keeps at least "adequate" liquidity. An upgrade could also follow from materially improving credit metrics (with FFO to adjusted debt consistently above 30%), improving free cash flow generation, and KMG managing to lower its debt via equity contributions from the government or reducing its large cash balances. In addition, we could upgrade KMG if we upgrade the sovereign, if our view on the likelihood of extraordinary support remains unchanged. We might consider a negative rating action if KMG's SACP deteriorated to 'ccc+', as a result, for example, of heavy liquidity pressure, although we view this as very unlikely. Also, we could lower the rating on KMG if we lowered the sovereign local currency rating, or if we saw that the government's stance toward KMG was no longer consistent with an "extremely high" likelihood of support. This could happen if the government reduces its stake in KMG via an IPO and if it loosens KMG's links with the government, which is not our base-case scenario at the moment. Primary Credit Analyst: Elena Anankina, CFA, Moscow (7) 495-783-4130; elena.anankina@standardandpoors.com Secondary Contact: Tommy J Trask, Dubai (971) 4-372-7151; tommy.trask@standardandpoors.com [2014-04-23]