OREANDA-NEWS. Fitch Ratings has affirmed JSC National Company KazMunayGas's (NC KMG or the group) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed KazMunaiGaz Finance Sub B.V.'s foreign currency senior unsecured rating at 'BBB'.

Wholly state-owned NC KMG is a holding company for Kazakhstan's (BBB+/Stable) interests in the oil & gas sector, and its ratings are notched down from the sovereign's. We view NC KMG's standalone operational and credit profile as commensurate with the 'BB' rating category. Its main upstream subsidiary is facing declining production, and we expect that any output growth would come from the group's joint ventures (JVs) and associates. Fitch do not consider the group's significant cash balance of KZT1,216bn, including short-term deposits at end-2013, as fully offsetting its high leverage and continue to focus our analysis on gross leverage metrics. Our forecast is that NC KMG's funds from operations (FFO) gross adjusted leverage will remain above 4x in 2015-2017.

Although NC KMG continues to benefit from strong links with the Kazakh state, we believe that an explicit state guarantee would be needed for a significant portion of NC KMG's debt to ensure full rating alignment. Therefore, we notch the group's ratings down one notch from the sovereign ratings. Fitch views NC KMG's standalone operational and credit profile as commensurate with the 'BB' rating category.

Fitch consider a successful ramp-up of Kazakhstan's new oil and gas projects operated JVs in which NC KMG has a stake as a pre-requisite for the country's production growth in the medium to long term. This is in contrast to JSC KazMunaiGas Exploration Production, NC KMG's majority-owned subsidiary, whose primary goal is to maintain stable output levels from its oil mature assets. On the other hand, the unsuccessful launch of a multi-billion dollar Kashagan project in which NC KMG has a 16.88% stake has led to an estimated two-year production delay, which highlights the inherent execution risks in the oil and gas industry, in particular when operating in environmentally sensitive areas and working with high pressure, high sulphur reservoirs. Nonetheless, we believe that upstream will remain NC KMG's main segment by EBITDA and cash flow contribution.

Fitch expect that cash dividends from NC KMG's JVs and affiliates will remain its principal source of operating cash inflows over the medium term. In 2013, NC KMG received KZT371bn in dividends from its JVs and associates, while it generated KZT344bn in net cash flows from its consolidated operations. In 2013, TengizChevroil LLP (TCO), NC KMG's largest affiliate by dividend contribution, paid KZT254bn in dividends to NC KMG, up from KZT244bn in 2012. Fitch expect a dividend reduction from TCO in 2014-2016 because of its large expansion plans.

NC KMG's Atyrau refinery upgrade is currently on-going. In 2014, the group expects to start upgrading its Shymkent and Pavlodar refineries to be completed by 2016 to ensure that all its products are compliant with Euro 4-5 emission standards. It estimates its total investments in downstream projects at USD4.9bn by end-2016.

Although we believe that the accessibility of the group's cash balances held at domestic banks has improved since 2009, the group continues to rely on external debt financing for capex funding. Therefore, we do not consider NC KMG's significant cash balance of KZT407bn plus short-term deposits of KZT809bn at end-2013 as fully offsetting its high indebtedness and continue to focus our analysis on gross, rather than net, leverage metrics.