Fitch affirms ratings of KazTransOil, outlook stable

/Fitch Ratings, Moscow, September 9, 2016, KASE headline/ – Fitch Ratings has affirmed Kazakhstan-based JSC KazTransOil's (KTO) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. A full list of rating actions is attached below. The ratings reflect KTO's strong operational and financial profile, which we expect the company to maintain at least over the medium term, as well as its strategic importance to the economy of Kazakhstan (BBB/Stable). KTO is the national operator of oil pipelines in Kazakhstan. The ratings of KTO are capped by those of its parent, JSC National Company KazMunayGas (NC KMG, BBB-/Stable). Excluding the share in transportation volumes of KTO's equity-accounted joint ventures (JVs), the company transported 51.2m tonnes of oil in 2015, equivalent to about 1m barrels of oil per day (mmbpd). In 2015, KTO generated KZT111bn in EBITDA and KZT125bn in funds from operations (FFO). As at 30 June 2016, the company had KZT67bn in cash and short-term deposits and no debt, and we expect KTO's FFO gross adjusted leverage to remain under 0.5x in 2016-2020. KTO has limited exposure to fluctuations in oil prices and the KZT exchange rate. KEY RATING DRIVERS Kazakhstan Oil Transportation Champion KTO dominates the Kazakh oil transportation sector that is critical for the national economy. As a national operator, KTO holds a quasi-monopolistic position in domestic oil transportation. In 2015 it transported 51% of crude produced in Kazakhstan, excluding the volumes of its two JVs with China National Petroleum Corporation (CNPC, A+/Stable), which operates the major part of the 20m tonne per annum (mtpa) capacity Kazakhstan-China oil pipeline. Ratings Capped by Parent's KTO's ratings are capped by NC KMG's because the parent exercises significant influence over KTO's free cash flow (FCF) through dividends, which NC KMG uses to service its large standalone unadjusted debt of KZT3.1trn (USD9.3bn) at end- June 2016. KTO's dividend payout ratio for 2015 was 114% and ranged from 66% to 231% in 2011-2015. In addition, in 2015 KTO provided a KZT20bn interest-free loan to NC KMG, which was repaid in June 2016. We view KTO's operational profile as commeasure with the 'BBB' rating category, limited by the regulatory environment and asset concentration in a single country. We expect that in the event of financial stress, the state would support KTO, either directly through equity contributions, loans from state-owned banks and funds, or indirectly through higher transportation tariffs. Stable Operations, Declining Margins In 2015, KTO's crude oil turnover (excluding JVs) edged up 3% yoy to 37bn tonne- kilometres despite a 1.6% drop in Kazakhstan's oil production. We expect that KTO's volumes and turnover will decline gradually over the medium term, reflecting falling production at Kazakhstan's principal brownfields. Additionally, the share of KTO's deliveries to domestic customers, mainly refineries, is likely to increase after the completion of refinery upgrades expected in 2017, driving down its EBITDA margins. In our view, KTO may compensate the income shortfall from lower domestic tariffs by increasing export tariffs. Tariffs Improves Revenue Visibility KTO's domestic transportation tariffs are regulated by Kazakhstan's Committee for Regulation of Natural Monopolies and Protection of Competition (CRNM). In 2015, CRNM approved five-year domestic tariff growth of 10% p.a. KTO has since raised its domestic tariffs twice, 10% each on 1 October 2015 and at the beginning of 2016. We expect further 10% annual increases in 2017-2019, improving the visibility of KTO's future revenue. KTO's export and transit tariffs were deregulated in 2015 but KTO left them unchanged at the levels set on 1 April 2014. KTO's ability to raise export and transit tariffs, which depends on global oil prices and netbacks to Kazakh oil producers, is beneficial to the company's credit profile. Sustainable Capex, Credit Metrics We expect KTO's annual capex to decline to KZT35bn-KZT40bn in 2016-2020, down from KZT71bn in 2015. KTO has completed the line-pipe replacement at the Tuimazy-Omsk-Novosibirsk-2 pipeline and increased its capacity to 10 mtpa from 7 mtpa, while construction works elsewhere will be undertaken insofar as the expansion is required by oil exporters. We expect KTO to report negative FCF until 2020 due to significant dividend payments, but its FFO adjusted gross leverage should remain well under 0.5x in the medium term. Limited Hypothetical JV Support We continue to treat the indebtedness of Kazakhstan-China Pipeline LLP (KCP), KTO's 50% JV with CNPC, as non-recourse to KTO due to an absence of legal guarantees. As of 30 June 2016, KCP's debt included a USD233m loan due in 2019 and a USD494m loan due in 2018, the latter of which KCP expects to extend until 2023. Fitch estimates that KCP's LTM to 30 June 2016 net debt/EBITDA was 5.8x, following the KZT depreciation in 2H15. We expect KCP's leverage to decline in 2016 as the company's USD-denominated revenues, mainly for transit of Russian oil to China, will increase in tenge provided that the exchange rate remains broadly stable and KCP uses its FCF (KZT11bn in 1H16) for debt repayment. In 2015-2016, KCP agreed with its creditors to lower debt repayments. While KTO's management expects KCP to service its debts without any help from the shareholders, we believe that it is possible that KTO and CNPC will support KCP in the future. Assuming that KTO provides financial guarantees for 50% of KCP's debt as of 30 June 2016, KTO's FFO adjusted gross leverage would not exceed 1.7x in 2016-2020, i.e. it remains below Fitch's negative rating guidance. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Stagnant transportation volumes in 2016-2020 -Increasing share of revenue from shipping to domestic customers -Higher domestic tariffs (by 10% per annum) and low single-digit rise in export tariffs -Costs increasing in line with inflation at about 7% per annum -Capex ranging between KZT35bn and KZT40bn in 2016-2020 -Dividends of about KZT50bn annually RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: -Positive rating action on NC KMG following a positive rating action on Kazakhstan. Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Negative rating action on NC KMG due to weakening support from the state to NC KMG, negative rating action on the sovereign or NC KMG's failure to improve standalone credit metrics. -KTO's aggressive capex or dividend payments exceeding our expectations resulting in a significant and sustained deterioration of its credit metrics, including FFO adjusted gross leverage above 3x. LIQUIDITY At 30 June 2016, KTO had KZT67bn in cash and short-term deposits mainly with Halyk Bank of Kazakhstan (BB/Stable). KTO had no financial debt as of 30 June 2016. FULL LIST OF RATING ACTIONS Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-', Outlook Stable Short-Term Foreign Currency IDR: affirmed at 'F3' National Long-Term Rating: affirmed at 'AA+(kaz)', Outlook Stable Senior unsecured rating: affirmed at 'BBB-' National senior unsecured rating: affirmed at 'AA+(kaz)'. Contact: Principal Analyst Slava Demchenko Analyst +7 495 956 9901 Supervisory Analyst Maxim Edelson Senior Director +7 495 956 9901 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Committee Chairperson Alex Griffiths Managing Director Corporates +44 20 3530 1709 Media Relations in Moscow: Julia Belskaya von Tell, Moscow, Tel: + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2016-09-13]