During the teleconference following the results of 9M2017, in addition to the financial results of KMG EP, questions were also raised regarding the shortage of petroleum products on the domestic market. According to the management of KMG EP, the government can take appropriate measures to cover the deficit.
The management of KMG EP sees several options for action from the government, one of which is the more expensive import of petroleum products from Russia for the purpose of selling on the domestic market at a market price. As reported by the leadership of NC KMG at a meeting of the Ministry of Energy on November 7, "NC KMG at a loss will solve the current problem by purchasing imported (Russian) diesel fuel for sale on the domestic market at the current market price of 157-160 tenge per liter".
In connection with the active discussion of the situation with a gasoline deficit in the media and at the government level, KMG EP assumes that the measures proposed by the government for price adjustment may include the option of purchasing oil from oil refineries directly from its producers. Petroleum products produced by the refinery, due to relative cheapness, will allow to balance the price in the domestic market. In the event of the forced cancellation of the scheme for independent oil processing and the return to the previous model of oil supplies to the refinery, which provides the government with the opportunity to control gasoline prices.
At the same time, KMG EP does not conduct formal negotiations with the government and the risks noted by the management are based solely on the assumptions of the Company itself.
As we indicated earlier in our report, the profitability of domestic sales after the transition to independent oil processing in April 2016 significantly improved, although it lags behind the export realization.
We have repeatedly singled out supplies to the domestic market as one of the vulnerable factors for KMG EP, given that they were unprofitable at the expense of lower prices compared to exports.
In general, the main argument that justifies our HOLD recommendation is based on the risk of a relationship with the parent company, which, in order to keep fuel prices at a socially acceptable level, may force KMG EP to return to unprofitable supplies to the domestic market.