"Fitch anticipates rating actions in the Kazakh oil and gas sector in 2010 to reflect stabilisation of the companies’ operational and financial profiles, but does not view upgrades on a broader scale as likely," says Angelina Valavina, Director of Fitch’s Energy, Utilities & Regulation team.

Negative Outlooks for the majority of the Kazakh oil and gas companies rated by Fitch were in place during 2009, as most ratings in the sector were constrained by the sovereign rating. The sovereign Outlook was revised to Stable from Negative at the end of 2009, and as a consequence the constrained ratings were also revised.

Fitch forecasts that the pressure on the credit metrics of Kazakhstan’s oil and gas sector will somewhat subside in 2010 in line with its upward revision of the base case oil price deck for 2010 to USD70/bbl, as a slow global economic recovery starts to impact pricing. The agency also expects to see a continued moderation of cost inflation in 2010, which should provide an additional uplift to companies’ financial metrics. Even in a less favourable market environment during 9M09, the financial performance of oil and gas corporates in Kazakhstan remained relatively solid, but was not consistent across all the subsectors. The deterioration of the integrated and upstream companies’ credit metrics (median gross leverage of 4.5x in 9M09 versus 1.1x in 9M08) was counterbalanced by the improved financial profiles of oil and gas pipeline operators (median gross leverage of 1.3x in 9M09 versus 2.1x in 9M08), as the latter were underpinned by tariff setting and in some instances a ship or pay mechanism.

In similarity to international industry peers, Kazakh oil and gas companies responded to subdued oil prices by reducing their capex in 2009, yet their operations remained capital intensive. While further capex scale-down is possible in 2010, overall it is likely to remain ambitious as the country is keen to expand its oil production and diversify its export routes. This may impede quick de-leveraging of companies’ balance sheets. At the same time, the country’s oil and gas sector benefited from Chinese support regarding the financing of some oil and gas projects, including construction of the Kazakhstan-China oil and gas pipelines, and this cooperation is likely to continue in the future.

Although Fitch does not view liquidity risk as fully receding in 2010, as most Kazakh oil and gas entities are exposed to the vulnerability of the domestic banking system, the agency gains comfort from the companies’ proven ability to manage their liquidity needs satisfactorily in 2009 and the fact that some signs of stabilisation have emerged in the banking sector. The agency continues to place greater emphasis on gross figures for leverage-related ratios, rather than net figures, in analysing Kazakh entities credit metrics. At the same time, Fitch believes that as most Kazakh oil and gas companies it rates are ultimately state-owned, and implement strategically important projects, they are better placed to gain access to their cash deposits at local banks, should difficulties arise.