Who Will Control KazMunaiGaz?

A big repartition is about to happen at the Kazakhstan oil-gas market. Based on our sources, KazMunaiGaz National Company may steamroll all the state oil-gas production assets after which the company will most likely be privatized. It is not hard to guess who gets to be the beneficiary.

On December 4, 2017, KazMunaiGas Exploration Production company published on its site an announcement on buying out its general depository rights (GDR) and delisting from the London Stock Exchange (LSE) and the Kazakhstan Stock Exchange (KASE). Since the document is short, we will cite it in its entirety (bolding ours – Kazakhstan 2.0).

“The Company wishes to announce its intention to launch a tender offer (the “GDR Tender Offer”) to repurchase all of its outstanding GDRs at a price of US$14.00 per GDR, representing a premium of 23.7 per cent. to the 30-day volume-weighted average GDR price of US$11.32 at 1 December 2017. The release of this announcement has been approved unanimously by the Board of Directors of the Company.

Subject to the approval by shareholders of the Company of certain amendments to the Company’s valuation methodology required in connection with the GDR Tender Offer (which approval will be sought at an initial EGM), and subject to the Company having acquired such number of GDRs as part of the GDR Tender Offer as will ensure that JSC National Company KazMunayGas (“NC KMG”) can exercise at least 75 per cent. of voting rights in the Company, the Company also intends to launch a further tender offer to acquire all of its outstanding Common Shares not already owned by NC KMG on the same economic terms as the GDR Tender Offer.

The Company will then also call a further EGM for shareholders to consider and, if thought appropriate, approve (as required by the Charter) the cancellation of the London listing of the Company’s GDRs and of the KASE listing of the Company’s Common Shares, and certain amendments to the Charter that will become effective upon delisting.

The launch of the GDR Tender Offer is expected to receive unanimous approval from both the Board of Directors of the Company and the Independent Non-Executive Directors of the Company (the “INEDs”), the approval of the INEDs being required under the Company’s Charter. The INEDs intend to recommend unanimously that GDR holders accept the GDR Tender Offer at the price of US$14.00 per GDR. However, no offer will be made until the INEDs and NC KMG have each given their approval to the launch of the GDR Tender Offer, which approvals remain subject to final agreement on the content of the circular setting out the full basis on which the GDR Tender Offer will be made.

If the GDR Tender Offer is made and becomes unconditional, it will remain open for acceptances until the date falling 90 days after commencement of the GDR Tender Offer”.

The same day, December 4, 2017, Forbes.kz wrote: “The preference shareholders of KazMunaiGaz Exploration Production company have addressed the company’s management, Samruk-Kazyna National Welfare Fund, and the KazMunaiGaz parent company demanding a fair repurchase of their shares”.

According to the Forbes’ sources, the letter (that Forbes has at hand) is addressed to Samruk-Kazyna Chairman and Prime Minister of Kazakhstan Bakytzhan Sagintayev, Chairman and Independent Director of KazMunaiGaz Exploration Production company Christopher John Walton, CEO of the company Kurmangazy Iskaziyev and signed by 30 preference shareholders. In the letter, the signers express their “concern in regard to the further prospects of the preference shares in the framework of the possible repurchase of the ordinary and preference shares by the KazMunaiGaz parent company”.

Here is the minority shareholders’ opinion (quote from Forbes.kz, bolding ours – Kazakhstan 2.0).

“The last repurchase offer made by KazMunaiGaz in the summer of 2016 contained a more than 40% discount for the price of the preference shares to the ordinary shares: $9.00 per GDR, $54.00 per one ordinary share, and $31.55 per one preference share in tenge terms. Such an offer, based on our expert opinion, was unfair not only to the ordinary shareholders who, eventually, rigorously voted against it but, even more so, to the preference shareholders.

We would like to ask all the interested parties, namely BoD of KazMunaiGaz Exploration Production and Samruk-Kazyna National Welfare Fund, in the process of the possible repurchase negotiations, adopt a fair approach and consider the rights of the preference shareholders to the undistributed KazMunaiGaz Exploration Production profit that, as of September 2017, constituted of almost 1.6 trillion tenge (more than $4.75 bln or about $70 per share)”.

Therefore, the position of the minority shareholders, the owners of the KazMunaiGaz Exploration Production ordinary shares and the independent members of the company’s Board representing them has not radically changed in the course of one year. Now they are prepared to vote not only for all the GDRs repurchase and the following ordinary shares repurchase by the issuer but also for the cancellation of the company’s LSE and KASE listings.

As of October 1, 2017, KazMunaiGaz Exploration Production minority shareholder KazMunaiGaz National Company controls 63.65% of the ordinary shares and 35.74% of them belong to Central Securities Depository (nominal shareholder). Based on our sources, the largest portion of these 35.74% belongs to Chairman of Atameken Timur Kulibayev via offshore companies, the smallest part – to his Chinese partners who once purchased them from Nursultan Nazarbayev’s middle son-in-law.

For this reason, the government, despite its previous attempts, was not able to force in appropriating the undistributed profit from KazMunaiGaz Exploration Production company together with reorganizing it for the purpose of simplifying the management system of the oil-gas state assets. Now, judging from the fact that the announcement of a possible GDR and ordinary shares repurchase from the minority shareholders and of the delisting from the stock exchanges was unanimously supported by BoD, it seems the previous disagreements had been eliminated.

So, a question arises why Timur Kulibayev and his Chinese partners have still accepted the offers of the Kazakhstan government, the sector ministry, and the parent holding?

We allow for the possibility that the price increase for the GDR repurchase from $9 to $14 and that for the ordinary shares repurchase from $54 to $84 plays its role. However, based on our sources, the fact that, after completion of the repurchase and the delisting, the company is to be reorganized and then privatized, was the key factor.

According to our sources, several reorganizational options are possible including merging KazMunaiGaz Exploration Production with its parent company KazMunaiGaz to cardinally improve the financial standing of the latter. There is, however, one more matter to consider.  Right after the state oil-gas company becomes the owner of all the state oil-gas production assets, it, according to our sources, will be privatized. And Timur Kulibayev is named one of the key beneficiaries.

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