/IRBIS, July 13, 2011/ - Fitch Ratings affirmed the following ratings of "Exploration Production "KazMunaiGas", Kazakhstan ("KMG EP"): Long-term Issuer Default ratings ("IDR") to foreign and local currency ratings at "BBB-"and short-term foreign currency IDR at "F3", was indicated by Fitch on July 12. The forecast on long-term issuer default rating is "Stable".

As indicated, according to the methodology Fitch "relationship between ratings of mother and daughter companies," the agency rated KMG EP as an independent company and believes that both positive and negative aspects of support from its parent is already an integral part of the business and financial profile of KMG EP. At the same time, the ratings are limited to ratings of its majority shareholder, the National Company KazMunaiGas ("NC KMG", "BBB-" / forecast "Stable"), with the increasing communication between parent and subsidiary structures. This is evidenced by the acquisition of KMG of bonds worth 221.5 billion tenge ($1.5 billion), which were issued by NC KMG in 2010, to support the liquidity of the parent structure.

It is noted that the ratings reflect KMG EP's strong financial results of the issuer in comparison with comparable oil and gas companies, as seen in EBITDAR margin for 2010 at 51.2% and an adjusted leverage of FFO (funds from operations) (with recourse) to 0.03x. Fitch expects the company will maintain good financial performance in 2011-2012, which will contribute to better performance of the oil industry. A positive factor for KMG EP is the low absolute level of debt with recourse (not including non-recourse debt associated with PetroKazahstanom), which amounted to 8.1 billion tenge (55.3 million dollars) at the end of 2010.

Fitch does not expect any significant negative impact on the financial performance of KMG EP from the planned acquisition of three oil and gas assets (producing assets Mangistaumunaigaz, Kazakhoil Aktobe and Kazahturkmunay) from NC KMG for about $ 750 million in 2011, as KMG intends to finance these acquisitions by domestic sources. If these acquisitions will be made, then Fitch, is likely to consider the debt associated with the production assets of Mangistaumunaigaz as non-recourse debt.

KMG EP has significant liquidity (by the end of 2010 cash position stood at 393.5 billion tenge, or $2.7 billion), but most of the cash and deposits placed with local banks, and access to such funds can still be limited. Therefore, the agency in its analysis continues to focus more on overall levels of leverage, rather than net figures.

"Fitch will continue to closely monitor the company's financing arrangements in respect of potential future acquisitions. According to the agency, the current strong financial position of KMG EP, especially its large cash position, provides a substantial margin for asset acquisitions in the future. However, the approach with funding by borrowings (eg, in case of unavailability of funds to accounts in local banks) can easily reduce this margin and lead to poor creditworthiness", - was stated in the message.

As noted, Fitch views the strong financial position as a mitigating factor for its less favorable business profile when compared with comparable issuers. KMG operates a relatively small scale with higher production costs and a low rate of multiplicity of resources in comparison with Russian peers with similar ratings. Growth potential depends on the successful implementation of acquisition strategy.

[2011-07-13]