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Fitch: TCO Expansion Lowers Future Dividend Stream to NC KMG
Fitch Ratings-Moscow/London-07 July 2016: Fitch Ratings says that the Tengizchevroil (TCO) expansion announced by Chevron Corp. on 5 July 2016 will result in a lower dividend stream to the Kazakh state-owned National Company KazMunayGas (NC KMG, BBB-/Stable), which owns a 20% stake in TCO, over the medium term. We have already incorporated this scenario in our rating case for NC KMG. Although we view the TCO expansion as positive for Kazakhstan's oil production in the longer term, it will slow down NC KMG's deleveraging.
Historically, cash dividends from TCO, of which NC KMG's share was nearly USD3.1bn in 2013-2015, were an important source of cash for the indebted state-owned company. 
Chevron announced that TCO, its 50% joint venture (JV) in Kazakhstan, will proceed with its expansion, future growth and wellhead pressure management project, estimated to cost nearly USD37bn and aimed at increasing its production by 260 thousand barrels of oil per day (mbopd) to about 1 million barrel of oil equivalent per day (boepd) with the first oil expected in 2022. Other TCO participants include ExxonMobil Corp. with a 25% stake and LukArco BV, a wholly owned subsidiary of PJSC Lukoil (BBB-/Negative) with a 5% stake. 
Kazakhstan's daily oil production reached nearly 1.7mmboepd in 2015, according to the BP Statistical Review of World Energy. It has nearly doubled since 2001, mainly due to large projects such as TCO that have been brought on stream by international majors with only a minor participation by the Kazakh state through NC KMG. Kashagan, another major new oil project in Kazakhstan, is expected to be re-launched in 4Q16 following a false start in 2013.
The decision to approve the TCO expansion is a good news for the global oil sector, which has been plagued by low oil prices over the past two years that resulted in massive capital investment cuts in exploration and production, estimated at as much as USD1trn globally between 2015 and 2020. The 50% tenge depreciation over the last two years has probably helped TCO participants to reach a decision on the expansion project as some of the project costs are tenge-denominated. 
The lower dividend stream from TCO to NC KMG over medium term is due TCO's massive investment in the project development and then repayment of the significant debt that we understand the JV is planning to raise for the project funding. This will slow down NC KMG's deleveraging from projected Fitch-calculated above 10x funds from operations adjusted gross leverage in 2016-2017 to 5x, the level that we see as commensurate with its 'B' standalone credit profile.

: Fitch Ratings
8 2016 | View: 210 | Press Releases | Printint version
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