Naubet Bisenov in Almaty -

Repeated delays in starting production at Kazakhstan’s giant offshore Kashagan field in the Caspian Sea, as well as low global oil prices, are straining the finances of the national oil and gas company KazMunayGas and its parent, the sovereign wealth fund Samruk-Kazyna, and are forcing them to seek state support in a bid to retain control over potentially lucrative assets.

On June 30 KazMunayGas announced that it would sell half of its 16.81% stake to Samruk-Kazyna for $4.7bn in cash in order to reduce its debts.

Following the announcement the company sought consent of holders of seven issues of its Eurobonds to the sale. It also asked permission to amend the method of calculating its net debt to ebitda ratio by deducting from its debts any cash and temporary cash investments provided by other members of the KazMunayGas Group. According to the terms of its Eurobonds, KazMunayGas is under a covenant that sets the maximum ratio of net debt to ebitda at 3.5x, whereas this ratio reached 3.2x at the end of 2014, according to Halyk Finance investment bank.

According to KazMunayGas, these measures – deconsolidating $2.2bn of debt relating to Kashagan, including $4.7bn in cash raised from the sale of the stake and about $5.4bn in cash held by its subsidiaries, according to Halyk Finance’s estimates – will bring down its net debt from $17.9bn at the end of 2014 to $5.7bn, around the level of its ebitda at the end of 2014, thus maintaining a net debt to ebitda ratio of 1x.

“KazMunayGas needed to sell an asset which doesn’t contribute to its ebitda at the moment, and Kashagan wasn’t producing any ebitda and it won’t produce ebitda until it starts producing oil,” Sabit Khakimzhanov, head of research at Halyk Finance, explains to bne IntelliNews. “KazMunayGas needed to sell the Kashagan stake for a period while it is not producing oil, that is until 2018.”

KazMunayGas expects Kashagan to start pumping oil in early 2017. Production at Kashagan was launched on September 11, 2013, but a leak on the gas pipeline running to the onshore processing facility led production to be halted on September 24. An attempt to restart operations was abandoned on October 9.

The deal to sell the Kashagan shares envisages Samruk-Kazyna granting KazMunayGas a call option to purchase all or part of the Kashagan shares on any date between January 1, 2018, and December 31, 2020, at the market price.

“KazMunayGas has simply shown its creditors its readiness to transfer and hold the stake. It is obvious that it would not be able to buy the stake back if it were to have problems with money in 2018, then the sale would become more or less final,” Khakimzhanov suggests.

Low global oil prices will have worsened the national company’s financials further, by reducing its ebitda from $5.6bn in 2014 to $2.8bn in 2015, thus taking the ratio to 2x, according to Halyk Finance’s estimates.

“This move suggests that KazMunayGas and Samruk-Kazyna are encountering financial constraints, and need more support from the state,” Alex Nice, a Kazakhstan analyst at the London-based Economist Intelligence Unit (EIU), tells bne IntelliNews. “I assume the authorities have not sought alternative buyers for the stake in Kashagan as they want to retain the state’s share in the project. Given delays at the project and the oil price, they may also have struggled to find a buyer at an acceptable price.”

Nearly a month after KazMunayGas’s announcement of the Kashagan sale, on July 23 Samruk-Kazyna, which fully owns the national oil and gas company, said it would transfer 10%-plus-one shares of KazMunayGas, valued at no less than KZT750bn ($4bn), to the National Bank by swapping them for its bonds held by the bank.

Samruk-Kazyna issued bonds worth KZT750bn in 2009 in order to exchange them for bonds issued by two banks that were undergoing restructuring at the time - BTA and Alliance. The yield on Samruk-Kazyna’s bonds was set at 4%, while the banks’ bonds had a yield of 9%. However, following the second restructuring of BTA, the yield on Samruk-Kazyna’s bonds was increased to 6%, Halyk Finance explained in a note on August 5. “The sale of a 10% stake in KazMunayGas has enabled the sovereign wealth fund to reduce expensive debt by buying it back,” Halyk Finance said. “This has also reduced Samruk-Kazyna’s credit risks.”

KazMunayGas’s sale of a stake in Kashagan and Samruk-Kazyna’s sale of a stake in KazMunayGas should not be linked because the national wealth fund seems to have waited until the completion of the country’s largest bank Kazkommertsbank’s merger with BTA, Khakimzhanov believes. “It did not make sense for Samruk-Kazyna to settle debt to the National Bank with cash,” he says. “Samruk-Kazyna has simply retired its notes issued to the National Bank this way.”

Although, according to the law, the National Bank has powers to carry out “trust management of assets”, the analysts question the government’s decision to involve the central bank instead of the National Oil Fund, which accumulated $70bn in May. “It’s relatively unusual for a central bank to acquire a large equity stake in a non-financial company. In the case of Kazakhstan, the usual channel through which the government provides state support to the real economy is the National Oil Fund. It’s odd that they didn’t use this, or the Pension Fund, on this occasion,” Nice of the EIU says.

At the same time, there would have been problems with using the money of the National Oil Fund directly, Khakimzhanov of Halyk Finance notes, as the 2010 blueprint for building up and using the assets of the fund bans the use of the fund’s money to acquire Kazakh securities, issue loans and to provide security for debt unless as a targeted transfer to the central budget for purposes defined by the president.

In the resolution on Samruk-Kazyna’s sale of the KazMunayGas stake to the National Bank, the government did not give reasons for the deal; nor did it explain the choice of the central bank for it, giving rise to doubts about its independence. “It’s hard to imagine that the initiative for the share acquisition came from the central bank. But it’s difficult to believe that Samruk-Kazyna or the National Bank operate independently of the government,” Alex suggests.

Khakimzhanov echoes Nice’s concerns over the central bank’s dependence from political decisions taken by the government. “This deal shows that the National Bank is not independent of the executive,” he concludes.