Fitch views the acquisition, which is still subject to approval by the European Commission, as beneficial for KMG’s business profile despite TRG’s much lower rating (primarily a result of a high level of short-term financing and poor liquidity). The acquisition of TRG will double KMG’s refining capacity, and provide direct access to downstream markets, including TRG’s 630 gas stations, in seven European countries (including France, Romania, Moldova and Bulgaria).  TRG’s refining capacity is 4 million tones and its distribution capacity is more than 7 million tones annually.

The acquisition is viewed by Fitch as being consistent with KMG’s strategy to expand its refining capacity and access to distribution routes. KMG see the acquisition as a platform for growth / expansion into the European / Mediterranean region, and some debt raising for acquisitions of this nature was anticipated in KMG’s existing rating. Even assuming the entire USD2.15bn transaction is funded by debt at the KMG level, holding company debt will still represent less than 15% of total group debt, which Fitch considers acceptable given the structure of the group.

KMG is a state-owned, vertically integrated oil and gas operator with subsidiaries in onshore oil exploration and production (KMG EP), oil transportation (KazTransOil (“KTO”; 'BBB-' (BBB minus)/'F3'/Outlook Stable)), natural gas transportation and distribution (KazTransGas (“KTG”; 'BB'/'B'/Outlook Stable)) and marketing and trading of oil and petroleum products (TH KMG).  

KMG is Kazakhstan’s second-largest crude oil producer (through its subsidiary KMG EP) after Tengizchevroil ('BBB-' (BBB minus)) and is responsible for managing the majority of the country's oil exports (through KTO) and all of the country's natural gas exports (through KTG). KMG is also the authorized body designated to represent the state's involvement in any Production Sharing Agreement regime.

The ratings also reflect KMG's strategic importance to the Republic of Kazakhstan ('BBB'/'F3'/Outlook Positive) in oil and gas. The Stable Outlook reflects Fitch's expectations that the company will continue to enjoy state support both in terms of regulation and tariffs as well as legislation designed to favour national interests, including 50% participation and operator rights in all newly discovered oil fields.

The detailed financing plan for the acquisition and the post-acquisition funding strategy for TRG are not yet available. Fitch will continue to monitor progress of the acquisition, especially with regard to additional debt at the KMG level and inter-group arrangements for funding.