OREANDA-NEWS. On December 14, 2007 Fitch Ratings has assigned Kazakhstan-based JSC KazMunaiGas Exploration Production (KMG EP) Long-term foreign and local currency Issuer Default ratings (IDR) of 'BBB-' (BBB minus) and a Short-term IDR of 'F3'. The Outlooks for the Long-term IDRs are Stable, reported the press-centre of KASE.

The ratings reflect KMG EP's advantages received through its parent company, National Company KazMunaiGaz (NC KMG; 'BBB'/Stable), established by the Kazakh government to represent the state's interests in the oil and gas industry. KMG EP has a first right of refusal on acquisitions of existing and new oil and gas projects in Kazakhstan. Exercising this right, KMG EP has expanded its production and reserve base through an acquisition of a 50% stake in JV Kazgermunai and a 50% stake in CITIC Canada Energy Limited developing the Karazhanbas field. In addition, KMG EP has a guaranteed access to oil pipelines fully- or partially-owned by NC KMG. However, the full credit for potential state support could not be given to the company, since it is entitled to these benefits indirectly through its parent company.

Furthermore, the ratings take into account the company's sound credit metrics demonstrated by its low leverage and high profitability. With a FY06 EBITDAR margin of 59,5% and gross leverage of 0,2x, KMG EP is favourably positioned compared with its international oil and gas peers (average FY06 EBITDAR margin of 41,5% and average gross leverage of 1,7x).

Nonetheless, the ratings consider the fact that KMG EP operates mature fields with declining production and high costs, as well as challenges the company faces to replace reserves. The agency believes that exploration and rehabilitation initiatives undertaken by KMG EP could only help sustain the production level with significant production expansion being possible only through acquisitions.

In addition, although Fitch acknowledges certain positive implications from KMG EP's indirect ties with the government, the risk of state influence on the company's involvement in risky projects and/or potential large debt-funded acquisitions through its parent company remains. Although Fitch notes that the current strong financial profile of the company with an ample cash position and low gross leverage provides headroom for potential acquisitions, an aggressive acquisitive strategy with large debt-funded M&A activities resulting in a substantial increase in leverage might put pressure on the current rating level.

Moreover, Fitch notes that the company's earnings and cash flows are fully exposed to the volatility of oil prices. This risk could partly be mitigated by a favourable market outlook.

The Stable Outlooks reflect a balanced operating environment for KMG EP coupled with a friendly regulatory regime.