Any protracted disruptions to JSC National Company KazMunayGas’s (KMG; BBB-/Stable) key hydrocarbons export route Caspian Pipeline Consortium (CPC) pipeline and terminals at Russia’s Novorossiysk port would adversely affect the company’s credit metrics but not necessarily its rating, Fitch Ratings says. The impact will depend on the duration of disruptions. KMG’s current solid financial profile on the back of high oil and gas prices and strong liquidity will cushion its credit metrics.
Approximately 60% of oil and gas condensate production attributable to KMG and its JVs is exported, while the balance supplies the domestic market. All volumes from megaprojects, Tengiz, Kashagan and Karachaganak, accounting for around 55% of KMG’s exported volumes in 2021, flow through the CPC pipeline and a further 37% of exports from KMG’s operating assets flow through the Atyrau-Samara pipeline. Volumes from export routes are eventually shipped from CPC and Transneft terminals in Novorossiysk.
Oil shipments through CPC’s terminal at Novorossiysk port were reduced in March/April 2022, officially due to storm damage. Oil flow was not affected by mine clearing operations in Novorossiysk port in June 2022 or by a Russian court ruling in July 2022. However, this heightened operational risk related to KMG’s hydrocarbons exports through Russia. The court initially ordered a 30-day suspension of CPC’s operations due to alleged issues with its preparedness for oils spills. The ruling was later overturned on 11 July 2022 and a RUB200,000 fine was imposed on CPC’s operator for technical irregularities.
Fitch estimates that spare capacity on existing non-Russian export routes such as Azerbaijan and China could currently accommodate around 63% of total KMG’s crude oil shipped through CPC in 2021 and around 40% of all hydrocarbons exported by KMG through the CPC and Atyrau-Samara pipelines. Construction of necessary infrastructure to replace entire export volumes may take several years.
Despite the deconsolidation of gas transportation business in 2021, KMG maintained its oil transportation and refining operations. Fitch estimates that earnings from upstream, including dividends from oil and gas joint ventures and CPC accounted for around 56% of 2021 adjusted EBITDA and in a high oil price environment for 91% of adjusted EBITDA in 1Q22.
Fitch assumes that KMG retains some financial flexibility, due to well-spread bond maturities, and robust liquidity of USD3.6 billion as of March 2022. We assume solid liquidity as of 1H22, despite KZT200 billion (around USD0.45 billion) dividend payment in May 2022. Fitch also expects that temporary interruptions in exports in 2Q22 will be off-set by prevailing high oil prices.
KMG sells volumes transported through CPC at CPC’s blend price, which is currently trading close to Brent quotations. Until July 2022, volumes transported thorough the Atyrau-Samara pipeline were sold at Urals quotation. To mitigate the impact of the high Urals discount, KMG shifted more volumes to CPC since Russia’s invasion of Ukraine. Since 1 July 2022, it has been marketing oil sent to the Atyrau-Samara pipeline as Kazakhstan Export Blend Crude Oil (KEBCO). KEBCO contracts trade at CPC’s price less one US dollar.
Fitch estimates that KMG’s domestic oil sales only somewhat mitigate disruption in exports. Netbacks realised on sales to refineries in Kazakhstan are lower and reflect production costs and transportation costs rather than international prices.
Fitch rates KMG on a top-down basis, one notch below Kazakhstan’s sovereign rating using its Government-Related Entities (GRE) Rating criteria. The protracted export disruptions may pressure its ‘bb-‘ Standalone Credit Profile but all else being equal, would not lead to a rating downgrade.
Source: Fitch Ratings