Kazakh oil pipeline operator KazTransOil outlook revised to positive, BB+' rating affirmed

/Standard & Poor's, Moscow, March 13, 07/ - Standard & Poor's Ratings Services said today that it revised its outlook on Kazakhstan-based oil pipeline operator KazTransOil (KTO) to positive from stable, following reassessment of the credit quality of 100% parent, government-controlled oil and gas holding KazMunaiGas (KMG, not rated). At the same time, the BB+' long-term corporate credit rating was affirmed. "The outlook revision reflects the possibility of bringing KTO's ratings closer in line with the credit quality of KMG," said Standard & Poor's credit analyst Eugene Korovin. "We believe KTO's credit quality depends heavily on that of KMG, because of the high strategic importance of KTO's operations, which account for more than 60% of national oil exports." The rating on KTO is now based on a top-down approach and is somewhat lower than our assessment of KMG's credit quality, because of the strategic risk of KTO's participation in new, large planned oil pipeline projects. Before raising the rating by one notch, we would need to be satisfied that KTO's stand-alone credit quality, currently assessed at 'BB+', would not deteriorate materially as a result of these projects. KMG's credit quality is linked to that of its 100% owner, the Republic of Kazakhstan (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Kazakhstan national scale 'kzAAA'), and benefits from both ongoing and extraordinary state support, based on the strategic importance of the energy sector to the national economy. KTO's rating is constrained by the strategic risks from the company's likely participation in the capacity expansion of crude export pipelines, which may lead to a more aggressive financial profile in the medium term. The rating is also constrained by high operational dependence on Russian government- controlled monopoly pipeline operator OAO AK Transneft (BBB+/Stable/-) to enable oil exports via KTO's major Atyrau-Samara export route. These weaknesses are offset by KTO's limited competition from other pipeline systems and its long-term contracts with oil producers. Increased diversification of KTO's export routes, good prospects for oil production growth in Kazakhstan, a prudent approach to risk allocation on new pipeline projects, and ample liquidity further support the rating. "An upgrade is possible if the gap in credit quality between KTO and KMG wanes due to stronger parental support and higher stand-alone credit quality for KTO," said Mr. Korovin. We also assume that KTO will retain access to Transneft's pipeline infrastructure on reasonable terms and will remain consistent with its prudent, risk-averse approach to new projects. Aggressive acceptance of new project risks that would substantially impair KTO's stand-alone creditworthiness might impair the existing upside potential in the rating in the absence of other mitigants such as stronger parental or governmental support. At Sept. 30, 2006, KTO had total debt of KZT49.5 billion under Kazakh GAAP. For details: Primary Credit Analyst: Eugene Korovin Secondary Credit Analyst: Elena Anankina Additional Contact: GroupE-MailAddress@standardandpoors.com [2007-03-14]