KazMunayGas: results for the 3rd quarter of 2024. Recommendation: Buy

KazMunayGas has published its financial statements for the third quarter of 2024. Despite a year-on-year decline in quarterly revenue, the company’s profitability has significantly increased. EBITDA and margins grew due to continued high dividend income from joint ventures. Against this backdrop, the company repaid part of its debt while still managing to reduce its net debt. As a result, the debt burden has fallen almost twice as much from multi-year lows.

We have updated our valuation model, revising KazMunayGas’s key financial indicators and reassessing the valuations of Tengizchevroil (TCO) and Mangistaumunaygas based on new financial reports. The weakening of the tenge and the rise in the risk-free rate in both the US and Kazakhstan were also factored in. As a result, the updated target price per KazMunayGas share is 17,600 KZT, implying a 26% growth potential from the latest market price. Recommendation – “Buy.”

(=) Revenue declined year-on-year but grew quarterly

KazMunayGas’s revenue in Q3 2024 was 2.1 trillion KZT, down 1.6% from 2023 but up 4.8% from the previous quarter. The year-on-year decline was driven by a 9.2% decrease in crude oil sales revenue due to a 7.9% drop in the average quarterly oil price. Meanwhile, total oil production increased by 7.3% year-on-year, largely due to a 13% rise at Ozenmunaygas. In quarterly terms, crude oil revenue fell by 8.1% despite a 2.2% production increase. However, a 30% quarter-on-quarter rise in petroleum product sales revenue offset this decline. This strong growth was enabled by a low base in Q2, when repairs were carried out at the Shymkent refinery. The share of joint ventures’ revenue also declined by 16% year-on-year but rose by 22% quarter-on-quarter, reaching 139 billion KZT. Most of the decline was due to TCO and Mangistaumunaygas, where quarterly profits dropped by 36% and 66% year-on-year, respectively. However, KazRosGaz ensured quarterly profit growth, rising 102% quarter-on-quarter. As a result, total revenue, including other income, amounted to 2.3 trillion KZT (-9.4% y/y and +1.9% q/q).

(+) KazMunayGas significantly increased its EBITDA margin

Operating expenses in Q3 decreased by 0.9% quarter-on-quarter and by 4.4% year-on-year. Notably, the cost of purchased crude oil and petroleum products fell by 11% quarter-on-quarter, while taxes (excluding income tax) dropped by 23% quarter-on-quarter. In contrast, production costs increased by 24% quarter-on-quarter. Consequently, operating profit amounted to 402 billion KZT, up 18% from the previous quarter but down 27% from 2023. Adjusted EBITDA saw a significant increase of 67% year-on-year and 29% quarter-on-quarter, reaching 734 billion KZT, with the adjusted EBITDA margin rising from 25% in Q2 to 31%. Growth was largely driven by dividends from joint ventures, which totaled 249 billion KZT compared to 41 billion KZT in 2023. Over the first nine months of 2024, KazMunayGas received 559 billion KZT in dividends (+159% y/y).

Quarterly net profit attributable to KazMunayGas shareholders was 311 billion KZT (-31% y/y and +21% q/q). The year-on-year decline was due to a one-time gain from the sale of a 50% stake in the Kalamkas-Sea, Khazar, and Auezov fields in 2023. Quarterly net profit per share was 510 KZT. Free cash flow in Q3 reached 408 billion KZT (compared to 460 billion KZT in Q2 and 242 billion KZT last year). Net debt decreased by 15% quarter-on-quarter and by 34% year-on-year. Cash reserves declined by 25% quarter-on-quarter due to a 312 billion KZT debt repayment. The net debt/EBITDA ratio dropped from 0.78x to 0.42x.

Our opinion and changes in the valuation model

We view KazMunayGas’s financial report as positive, given the sharp increase in EBITDA and margins. Additionally, the debt burden has significantly decreased, driven by both EBITDA growth and net debt reduction. The trend of receiving higher quarterly dividends from joint ventures continues. While free cash flow was slightly lower than in the previous quarter, it remains at a high level. This is already reflected in the company’s guidance to increase dividends from 492 KZT to 574 KZT per share next year. At this stage, there is reason to believe that KazMunayGas will be able to maintain this dividend level in the future.

However, the decline in average oil prices in Q3 could negatively impact future revenue and profitability. Additionally, the significant depreciation of the tenge against the dollar is likely to have a positive effect on Q4 results. In our updated valuation model, we revised key financial metrics and incorporated new reports for TCO and Mangistaumunaygas. TCO’s valuation was notably lowered due to revised assumptions based on its 2023 financial data. The weighted average cost of capital (WACC) was raised following an increase in the risk-free rate and US Treasury yields. Furthermore, EBITDA margin estimates were slightly increased based on actual results. The reduction in net debt also positively impacted the final valuation.

Taking all these factors into account, we have slightly raised the target price of KazMunayGas shares to 17,600 KZT, with a 26% growth potential. Recommendation – “Buy.”