Kazkommerts Securities OJSC (Kazakhstan) has downgraded forecast of credit rating of Hurricane Hydrocarbons Ltd. (Canada) to negative

/IRBIS, May 6, 03/ - On April 25 of 2003 Kazkommerts Securities OJSC (Almaty, hereinafter KKS) reexamined outlook of credit rating of Hurricane Hydrocarbons Ltd. (Kalgari, Aiberta, Canada, hereinafter - HHL) from "positive" to "negative", having remained the rating unchanged on the level of "ВВВ". It follows from the Report about changing of the rating, which KKS has presented to IRBIS agency on May 4 for publication. In the same report eurobonds of Hurricane Finance B.V., which were issued on February 12, 03 for 7 years on the security of HHL, "Hurricane Kumkol Munai" (Kazakhstan) and "HOP" (Kazakhstan) with semi-annual coupon 9.625% гAPR for USD125 m., have been assigned rating "ВВВ-" with "stable" outlook. The report says that during the period of time, which has passed since KKS issued the first rating November 2002 HHL has increased and prolonged its financial commitments to 2010. In the beginning of 2003 HHL borrowed $190 mln under a four-year syndicated loan agreement with a consortium of European banks and guaranteed $125 mln eurobonds with 9.625% coupon issued by Hurricane Finance B.V. due February 2010. At the same time HHL called 12% Senior Notes for $208 mln due 2006. Taking into account an additional $11.5 mln bond issue by HOP (Hurricane Oil Products, located in Shymkent) in February 2003 and the likely repayment of short-term debt of $15 mln, the total company debt is going to rise by $103 mln to $396 mln. Debt support provided by the proved reserves weakened when HHL's financial commitments were prolonged to a 7-year tenor and reached parity with the current reserve life index for proved reserves of 7.2 years (reserves divided by the annual production). If Kazgermunai, 50% owned by HHL, starts the intensive field development in 2003, then HHL's cumulative production may reach 356 mln of barrels (the volume of proved reserves) even earlier than in seven years. Taking into account that the capital expenditures budget of $167 mln for 2003 can be easily financed by expected operating cash flows, HHL's cash was likely to exceed $170 mln after the rise in debt by $103 mln. We think that the Company will try to use this cash excess to acquire oil companies/fields in order to increase its crude oil reserves. We also expect that these acquisitions may lead to the growth of debt and deterioration of financial ratios for the Company. Augmented crude oil exports on FOB Black Sea port terms produced disappointing results. Instead of expected cost savings, the Company's own oil delivery to Black Sea ports cost on average $1/barrel more compared to that on FCA Tekesu terms (near Shymkent) in the last 3 quarters 2002. Despite this, HHL plans to raise the share of exports on FOB Black Sea port terms. HHL expresses no intentions to set up and develop a network of petrol stations for its downstream business similar to Helios network owned by the Pavlodar refinery. In our opinion, consolidation of petrol stations will intensify with active involvement of the rival refineries while competition among refineries will strengthen after the reconstruction of the Atyrau refinery. As a result, HOP's dominant market share (about 42%) will probably shrink in the future. The law about the state regulation of production and distribution of certain types of refined products of April 07, 2002 has strengthened the state regulation of refined products market in order to ensure that consumers have enough refined products at low prices. Combined with high volatility of wholesale prices for refined products and likely shrinkage of HOP's share in refined products market in the future, this should considerably restrict HHL's prospects to increase profits from refined products in the future. The above-mentioned was the reason for downgrading of rating of HHL by KKS's specialists. At the same time KKS's analysts assume in the nearest seven years free money flows of HHL from the assets it possesses significantly exceed payments on existing at present debt liabilities, making by it the big reserve of financial strength for creditors of HHL. HHL keeps production costs at a low level - $1.22/ barrel in 2002, while its reserve replacement costs for the last 3 years - $0.61/barrel were the lowest in the world among public companies according to John S. Herold's research. In 2002 the growth in proved reserves exceeded production by 16%. The oil refinery in Shymkent, the leading one in Kazakhstan, mitigates to some extent the financial risk of the Company in case of low oil prices. KKS's specialists regard the refinery upgrade in 2002, which led to the reduction of the heavy fuel oil yield from 40% in 2001 to 36% in 2002 with the respective increase in the yield of higher value products. HHL is going to complete the installation of the vacuum distillation equipment in 2003 that will enable the Company to further reduce the heavy fuel oil yield from 36% to 19% and produce higher priced vacuum gasoil at 17% yield. According to KKS's information HHL is the largest integrated oil & gas company and the 3rd largest company in terms of crude oil production in Kazakhstan. HHL extracts light oil of high quality (42° API) at seven fields and is a 50% shareholder in Turgai Petroleum and Kazgermunai joint ventures that produce crude oil at other four fields. All fields are located in central Kazakhstan - Kzyl-Orda and Karaganda regions. In May 1999 HHL received protection from creditors due to low oil prices and high refining fees at Shymkent oil refinery, which capitalized on the fact that the only pipeline from HHL fields led to this refinery. In March 2000 HHL has restructured its debts and emerged from creditor protection ahead of schedule buying the control stake in Shymkent oil refinery. [2003-05-06]