S&P assigns JSC KazMunaiGas Exploration BB-plus rating

(The following statement was released by the ratings agency)

Oct 1 - Standard & Poor's Ratings Services said today it assigned its 'BB+' long-term corporate credit rating to Kazakhstan-based oil company JSC KazMunaiGas Exploration Production (KMG EP). The outlook is stable.

The rating is based on a top-down approach and is one notch below that on KMG EP's 58% parent, 100% state-owned holding JSC NC KazMunayGas (KMG; BBB-/Stable/--).

The ratings on the parent are pegged to those on the Republic of Kazakhstan (foreign currency BBB/Stable/A-3, local currency BBB+/Stable/A-2). We assess KMG EP's stand-alone credit quality as 'BB'.

The rating on KMG EP is constrained by the absence of parental guarantees on the company's debt and cross-default provisions in the parent's debt, and by its substantial minority shareholding.

The 'BB' stand-alone credit profile reflects KMG EP's mature and land-locked reserve base; relatively high cost position; and the company's fairly aggressive financial policy marked by its substantial appetite for acquisitions, which could result in significant increases in debt.

Mitigating factors include KMG EP's adequate profitability on the back of high oil prices and exports and its net cash position.

"Standard & Poor's expects that KMG EP will remain a core subsidiary of KMG and will continue to enjoy parental support, notwithstanding the IPO minority stake," said Standard & Poor's credit analyst Elena Anankina.

"As a result, we expect to maintain a top-down rating approach." The evolution of the rating on KMG EP will largely depend on the evolution of KMG's credit quality, and, ultimately, on the sovereign rating on Kazakhstan.

Upward rating potential could result from a reduction in the rating differential between KMG EP and KMG.

This will depend on any strengthening of KMG EP's stand-alone credit quality, which could come from additional acquisitions as long as debt levels do not rise too aggressively. A strengthening of KMG's policy for supporting strategic subsidiaries could also have a positive impact.

We see limited potential for rating downside. The rating factors in the planned acquisitions of a 50% stake in Karazhanbasmunai and a 33% stake in PetroKazakhstan from KMG (both transactions will be subject to the board's approval, however).

KMG EP will be able to finance these transactions from its substantial cash balances or with favorably structured long-term loans. The transactions will improve the company's business profile by enhancing scale and diversification and will facilitate access to low-cost, highly profitable operations with some growth potential.