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Fitch: KMG EP Delisting Could Help Reduce NC KMG's Gross Debt
Fitch Ratings-London-19 December 2017: Fitch Ratings says that the proposed minority share buyout and delisting of JSC KazMunaiGas Exploration Production (KMG EP), a 63%-owned upstream subsidiary of JSC National Company KazMunayGas (NC KMG, BBB-/Stable), should improve NC KMG's financial flexibility by giving it full access to KMG EP's cash flows and cash reserves. This could be marginally credit positive for NC KMG if the additional cash was used to reduce the group's high debt burden.

On 8 December 2017, KMG EP announced that its board unanimously approved the launch of a conditional tender offer to repurchase all of its outstanding global depository receipts (GDRs) at USD14 per GDR. NC KMG estimates the total value of all outstanding GDRs and shares to be eventually tendered in the open market at USD1.95 billion. This is comfortably covered by KMG EP's unrestricted cash balances and deposits, which stood at USD3.9 billion at 30 September 2017. KMG EP has virtually no debt and represents a significant portion of the group's earnings with around a quarter of consolidated EBITDA in 9M17 (Fitch calculations).

A full take-up of the offer would entitle NC KMG to 100% of dividends paid by KMG EP after the buyout. We expect the group to upstream a significant share of the remaining cash at KMG EP. Should these cash inflows be applied towards deleveraging, NC KMG's unadjusted gross debt including oil prepayments could reduce to below USD11 billion by year-end 2018, from our USD12 billion forecast, and from USD16 billion at 30 September 2017. This would marginally support the group's weak financial profile.

We also believe NC KMG will enjoy greater control over KMG EP if it implements amendments to its charter described in the tender offer. This would potentially lead to enhanced operational integration of KMG EP within the NC KMG group, and a better alignment of interests between NC KMG and KMG EP.

We rate NC KMG on a top-down basis, one notch below Kazakhstan (BBB/Stable), reflecting strong strategic and operational links. We see NC KMG's standalone credit profile as weak. Its funds from operations adjusted gross leverage was 7.3x at end-2016, a level more typical for 'B' rated companies. The support that we factor into NC KMG's rating includes an expectation that over the medium term Kazakhstan will manage NC KMG with a financial profile that gives it some standalone resilience to oil price shocks.


Dmitry Marinchenko, ACCA
+44 20 3530 1056
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Source: Fitch Ratings

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