KAZMUNAIGAS EP posts very strong quarter
Troika's view: The company beat our very modest estimates by a mile and outperformed on every single cost item in addition to showing slightly better revenues on the back of higher income from associates.
We were especially pleased with the free cash flow from legacy operations, which amounted to $376 mln, the fourth best level in the company's post-IPO history and by far the highest since 2009, when the new taxation was implemented by the Kazakh government. It was about the same as for all of last year. To be fair, the low capex ($81 mln) is hardly sustainable, but the coming dividends from KazGerMunai and PetroKazakhstan will compensate for the compression in free cash flow from legacy assets. The company's cash position now stands at $5.2 bln, which translates into an EV of $3.2 bln. After such a strong quarter, we will raise our EBITDA forecast for 2012 by 5-6% to $2.5 bln, which may end up conservative in light of current oil prices and hopefully some production recovery.
As we discussed in our recent Oil and Gas Quarterly "Till Debt Do Us Part" (published in April), the current state of affairs - with KazMunaiGas EP sitting on cash and a declining asset base, while NC KazMunaiGas loads up on more debt and projects - is unsustainable for long. If so, then KazMunaiGas EP's investment case is becoming increasingly binary, with a resolution expected toward the middle of next year. Purchasing another bond from NC KazMunaiGas would destroy KazMunaiGas EP's investment case; paying a high dividend or accepting assets would boost it. We cannot tell which one will take place, but the refinancing of the bond or an outsized dividend both seem less logical to us, while an accelerated asset transfer is more likely, company's press release reads.
