Fitch Ratings-Moscow/London-08 September 2015: Fitch Ratings has affirmed Kazakhstan-based JSC KazTransOil's (KTO) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has simultaneously upgraded KTO's Long-term local currency IDR to 'BBB+' from 'BBB' with a Stable Outlook. KTO's National Long-term rating and National senior unsecured rating have also been upgraded to 'AAA(kaz)' from 'AA+(kaz)' to reflect the upgrade of KTO's Long-term local currency IDR. The Outlook on the National Long-term rating is Stable. A full list of rating actions is below.
KTO's ratings reflect its strong operational and credit profile, which we expect it will maintain at least over the medium term, and its strategic importance to the economy of Kazakhstan (BBB+/Stable). KTO is the national operator of oil pipelines in Kazakhstan. Its ratings are capped by those of JSC National Company KazMunayGas (NC KMG, BBB/Stable), KTO's majority shareholder. Excluding the share in transportation volumes of KTO's equity accounted joint ventures (JVs), it shipped 54.4m tonnes of oil in 2014, equivalent to about 1.1m barrels of oil per day (mmbopd). In 2014, KTO generated KZT106bn in EBITDA and KZT96bn in funds from operations (FFO). At 30 June 2015, the company had KZT48bn in cash and short-term deposits and no debt, and we expect KTO's FFO gross adjusted leverage to remain well under 0.5x in 2015-2018. KTO has limited exposure to fluctuations in oil prices and tenge exchange rates.
KEY RATING DRIVERS
Kazakhstan Oil Transportation Champion
KTO dominates the Kazakh oil transportation sector, which is critical for the national economy. As a national operator, KTO holds a monopolistic position in domestic oil transportation. KTO estimates that in 2014 it shipped 53% of crude produced in Kazakhstan, excluding the volumes shipped by its two JVs with China National Petroleum Corporation (CNPC, A+/Stable), which operate the major parts of the 20m tonne per annum capacity Kazakhstan-China oil pipeline.
Ratings Capped by the Parent
We cap KTO's ratings at NC KMG's level because the parent exercises significant influence over KTO's free cash flow (FCF) through dividends, which NC KMG needs to service its large standalone debt of KZT3.2trn (USD17.3bn) at end-March 2015. KTO's dividend payout ratio for 2014 was 100% and has been relatively high historically, ranging from 66% to 231% in 2011-2014. We consider that KTO's uncapped ratings are in the low 'A' category, limited by country-specific corporate governance issues, evolving regulatory environment and concentration of assets in a single country. We also believe that in the event of financial stress, the state would support KTO, either directly through equity contributions or loans from state-owned banks and funds, or indirectly through higher transport tariffs.
LC IDR, National Rating Upgrade
Fitch has upgraded KTO's Long-term local currency (LT LC) IDR to 'BBB+' from 'BBB' to align LT LC IDRs of KTO and NC KMG, as KTO's uncapped long-term foreign currency rating is in the 'A' category, ie, higher than NC KMG's FC LT IDR of 'BBB'. The alignment is in line with Fitch's methodology. KTO's National LT rating and National senior unsecured rating have also been upgraded to 'AAA(kaz)' from 'AA+(kaz)' to reflect the upgrade of KTO's LC LT IDR. The Outlook on National LT rating is Stable.
In 2014, KTO's crude turnover (excluding JVs) edged down by 3% yoy to 36 billion tonne-kilometres primarily due to lower volumes of oil shipped by Tengizchevroil LLP (TCO), JSC PetroKazakhstan Kumkol Resources and Karachaganak Petroleum Operating B.V. We expect that KTO's volumes and turnover will decline gradually over the medium term, reflecting declining production at Kazakhstan's maturing principal oilfields.
Russia and Kazakhstan agreed to ship up to 10m tonnes (mt) of Russian crude to China at a specified tariff starting from 1 January 2014. In accordance with the agreement, OJSC OC Rosneft sold around 7 million tonnes of oil through Priirtyshsk-Alashankou section of the Kazakh pipeline system in 2014. We assess the impact of the change is broadly neutral for KTO.
Tariffs Increases Mitigate Devaluation
KTO's tariffs are regulated by Kazakhstan's Committee for Regulation of Natural Monopolies and Protection of Competition (CRNM), which periodically reviews them. In 2015, CRNM has approved the first five-year tariff schedule for domestic oil transportation. Starting from 1 October 2015, KTO's domestic tariff will be increased by 10% from 2014 levels and the annual tariff growth is set to be approximately 10% in 2016-2019. In Fitch's view, adherence to the tariff schedule will give better visibility on KTO's future revenue and improve the company's credit profile.
KTO's export tariff has remained flat since 1 April 2014. We acknowledge that there is a possibility of regulated tariffs for KTO's services being raised by CRNM after tenge devaluation in August 2015. However, the extent of the tariff hike will depend on oil prices, which currently exert pressure on Kazakh oil producers. We view timely tariff indexation as essential for KTO's sound financial performance.
Solid Credit Despite Significant Capex
We expect that KTO's annual capex may exceed KZT50bn in 2015 and 2016, compared with KZT83bn in 2014, as it is undertaking significant projects including the construction of the second line of the Kazakhstan-China pipeline to boost its capacity to 20m tonnes per annum and replacement of line pipe at Tuimazy-Omsk-Novosibirsk-2 oil pipeline. We expect KTO to report negative FCF until 2018 due to higher capex, but FFO adjusted gross leverage should remain well under 0.5x in the medium term.
Non-Recourse JV Debt Excluded
We continue to treat the indebtedness of Kazakhstan-China Pipeline LLP (KCP), KTO's 50% JV with CNPC, as non-recourse to KTO. At end-June 2015, these borrowings included a USD263m (outstanding amount) bank loan due in 2019 and a USD564m (outstanding amount) bank loan due in 2018 that had been guaranteed by CPNC until 31 December 2013. Fitch estimates that its net debt/EBITDA increased to 4.3x at end-2014 from 2.8x at end-2013, while its FCF equalled around KZT17bn, slightly up from KZT15bn in 2013. We believe that the JV will be able to service its debts without any help from KTO.
Fitch's key assumptions within our rating case include:
- Stagnant transportation volumes in 2015-2019
- Increasing share of domestic turnover
- Growing domestic tariffs (by 10% per annum) and rise in export tariffs in 2016 (15%)
- Costs increasing with inflation at 7-10% per annum
- Capex increasing to KZT70bn in 2015 and falling to KZT45-50bn in 2016-2018 after the completion of main expansionary projects
- Dividends equal to 80% of net income
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on NC KMG's ratings would likely lead to positive rating action on KTO.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on KMG NC would likely be replicated on KTO.
- KTO's aggressive capex and/or dividend payments exceeding our expectations resulting in a significant and sustained deterioration of its credit metrics, including FFO gross adjusted leverage above 3x.
At 30 June 2015, KTO had KZT45bn in cash and short-term deposits mainly with local banks, eg, Kazkommertsbank (B-/Negative) which held nearly 43% of KTO's funds at that time and Halyk Bank of Kazakhstan (BB/Stable) which held another 35%. KTO estimates that its comfortable minimum level of liquidity equals approximately KZT15bn. KTO had no financial debt at 30 June 2015.
FULL LIST OF RATING ACTIONS
Long-term IDR: affirmed at 'BBB', Outlook Stable
Local currency Long-term IDR: upgraded to 'BBB+' from 'BBB', Outlook Stable
Short-term IDR: affirmed at 'F3'
National Long-term Rating: upgraded to 'AAA(kaz)' from 'AA+(kaz)', Outlook Stable
Senior unsecured rating: affirmed at 'BBB'
National senior unsecured rating: upgraded to 'AAA(kaz)' from'AA+(kaz)'