KMG EP on the intention of the GDR buyout.

Altynay IbraimovaDecember 04, 2017

Today, KMG EP announced its intention to carry out a tender offer (offer) for the redemption of all of its issued GDRs at a price of $14/GDR, which implies a premium of 23.7% to the weighted average price for the last month.

If the proposal is approved by the shareholders of KMG EP and subject to the acquisition by the Company of the quantity of GDRs that provides for the parent KMG NC the possibility of exercising at least 75% of the voting rights in KMG EP, the Company intends to acquire all of its common shares from minority shareholders under the same conditions as the offer for the GDR.

The launch of the GDR proposal, as expected by KMG EP, will be unanimously approved by both the Board of Directors of the Company and its independent non-executive directors (IND). In turn, according to the Company, the IND intends to unanimously recommend to the holders of the GDR to accept the current offer.

At the same time, the Company specifies that the offer will not enter into force until the parent company and independent directors accept the content of the circular justifying all the grounds for the forthcoming proposal.

Our view

The offer to buy back shares of KMG EP for minority shareholders is expected, given the plans to enter the IPO of the parent company of NC KMG.

Previously, proposals for the redemption of shares of KMG EP expected different conditions. In 2014, with an average oil price of $99.5/bbl, NC KMG offered to buy back shares at a price of $18.5/GDR, at the end of 2015, when the average price of oil dropped to $53.6/bbl, the buyback price was $7/GDR (average market price per period 10 October-9 November). The redemption offer in 2016, accompanied by changes in the Relationship Agreement with NC KMG, was made in conditions of an average oil price of $45.13/bbl and assumed a buyout price of $9/GDR. Thus, taking into account the average oil price during 2017 to the present day ($ 54.02 / bbl), the price of the planned redemption of KMG EP is, in our opinion, sufficiently taken into account the interests of minority shareholders.

At the same time, for the majority shareholder who plans an IPO in the next two years, given the positive dynamics of oil prices and an optimistic forecast for oil prices for the next 5 years, the current level of the repurchase price should also be optimal. Recall that the debt burden of NC KMG is quite high (T3487bn) and the cash of KMG EP, which is planned to be redeemed for NC KMG, is quite important, which makes it expedient to buy out at a low price. The restoration of oil prices may mean a rise in the price of the alleged ransom.

It should be noted that under the current conditions for the buyout of GDRs that are in free circulation, KMG EP will spend $ 2bn or T687bn, which is 50.5% of cash on the balance sheet as of the end of 9M2017. Nevertheless, taking into account the rise in oil prices in the last two months (the average oil price was $ 63 / bbl), we assume that it will be beneficial for NC KMG to agree on the terms of the buyout. Moreover, for the Company it is important to maximally profitable access to the IPO.

The repurchase price exceeds our 12M TP by 5% (12 M TP is taking into account the risks of the relationship with the parent company), and therefore we recommend that minority shareholders accept the offer of KMG EP.