OREANDA-NEWS. August 10, 2009. Fitch Ratings affirmed Kazakhstan-based JSC KazMunaiGas Exploration Production's (KMG EP) Long-term foreign and local currency Issuer Default ratings (IDR) at 'BBB-' respectively, and affirmed its Short-term IDR at 'F3'. The Outlooks for the Long-term IDRs remain Negative. The stand-alone Outlook on the Long-term foreign currency IDR is viewed by Fitch as stable, but is constrained to negative by the sovereign rating level, reported the press-centre of KASE.

KMG EP's ratings reflect its strong financial profile (FY08 EBITDAR margin of 67% and FY08 gross leverage of 0.1x) compared with the median FY08 EBITDAR margin of 31% and median FY08 gross leverage of 1.0x for Russian oil and gas producers rated by Fitch. The company also benefits from a low absolute level of indebtedness and high cash flow generation. Fitch views the company's solid credit metrics as a mitigating factor for its less favourable business profile compared with its peers (eg smaller scale of operations, low reserve life and costs closer to the higher end of the peer group).

However, Fitch notes that the company is exposed to the weakening Kazakh banking system, where most of its cash position is held. This risk is addressed in Fitch's analysis through greater emphasis on gross leverage, rather than net leverage, and the treatment of cash deposits at BTA Bank ('RD') as restricted. The agency believes that at present this risk is offset, to a certain extent, by KMG EP's solid credit metrics along with a relatively moderate capex programme.

Fitch will closely monitor the company's financing arrangements regarding potential acquisitions. As the possibility of organic growth is limited, Fitch expects the company to embark on an acquisition-driven expansion underpinned by its first right of refusal on the acquisition of onshore oil and gas assets in Kazakhstan. Although the agency believes that KMG EP's current strong financial profile, especially its ample cash position of KZT503.6bn (USD4.2bn) at FYE08, provides significant headroom for pursuing acquisitions, its debt-funding approach could erode this headroom and result in a deterioration of KMG EP's credit metrics.

According to Fitch's Parent and Subsidiary Rating Linkage methodology, KMG EP is rated on a standalone basis, albeit with both positive and negative implications of its ownership being indirectly incorporated into its ratings through their impact on the company's business profile. The company is 57.95%-owned by KazMunaiGaz National Company ('BBB-'/Negative).

In addition, as a pure upstream company, KMG EP is vulnerable to oil price shocks, which is somewhat offset by its current strong financial standing.