April 20, 2016 / 3:18 PM / a year ago

Kazakh oil firm under pressure from state-owned parent

ALMATY, April 20 (Reuters) - Minority shareholders in Kazakhstan's biggest listed oil company, Kazmunaigas Exploration and Production, say the state-owned parent company is impinging on their interests in a drive to squeeze cash out of the firm.

The dispute is part of a global pattern of oil producing states quarrelling with foreign investors as low oil prices leave a dwindling pot of money for them to share out.

Floated 10 years ago, Kazmunaigas Exploration and Production (KMG EP) enjoys a high degree of autonomy from its parent, national oil company Kazmunaygaz (KMG NC), because it has three powerful independent directors on its board.

KMG NC, fully owned by the government, has a 58 percent stake in KMG EP, while minority shareholders, including China's sovereign fund, China Investment Corporation, and funds run by managers such as BlackRock, own 34 percent.

The heavily indebted parent narrowly averted default last year, when Kazakhstan's central bank effectively printed the equivalent of $4 billion to bail it out. Meanwhile, upstream-focused KMG EP was sitting on a cash pile worth more than $3 billion accumulated during a decade of high oil prices.

According to people close to two minority shareholders in the listed firm, the parent company is using a variety of tactics to squeeze the operations and finances of KMG EP.

"They see the company has money and they want to take it. Of course, this is not how partners are supposed to behave," said one minority shareholder who spoke on condition of anonymity.

Kazmunaygaz did not reply to a request from Reuters for comment. China Investment Corporation and BlackRock declined to comment.

PRESSURE

Tensions emerged last November, when the parent company proposed amending the special relationship agreement with its subsidiary. It also said it would support a buyback of shares from any shareholder who wished to sell their equity within two months after the endorsement of the revised agreement.

Kazmunaygas wanted the subsidiary's board to vote on the amendment in January but that vote has still not taken place.

"Negotiations on the issue of reviewing the relationship agreement continue, we will notify the market as soon as there is clarity in this regard," KMG EP said a written response to questions from Reuters.

In one of a series of steps that minority shareholders say have put pressure on the subsidiary, KMG NC this year slashed the prices at which it buys oil from KMG EP.

The subsidiary is obliged to sell about 30 percent of its output on the domestic market.

Previously, such sales were made at a price which covered KMG EP's costs plus a three percent margin. In January, KMG NC said it would pay only a fraction of that, forcing KMG EP to switch to a new processing scheme from April, although it still ends up getting less money than before.

"They are essentially channelling the profits out of the publicly traded subsidiary through non-market arrangements, but doing it in a less apparent manner - through government regulatory bodies," said the minority shareholder in KMG EP.

In another setback for KMG EP minority shareholders, directors representing the parent company voted last month to pay no dividend for 2015, for the first time since the company's flotation, citing low oil prices.

Independent directors voted against that and even proposed an additional special dividend but were outnumbered. KMG EP's net profit jumped five-fold last year because of foreign exchange gains from the tenge's sharp devaluation.

"We think the decision to pay no dividend is linked to the fact that negotiations between KMG EP independent directors and KMG NC ... continue and may be in their final stage," said Aivar Baikenov, head of research at Kazakh firm Asyl Invest which is also a minority shareholder in KMG EP. (Additional reporting by Vladimir Soldatkin in Moscow and Matthew Miller in Beijing, editing by David Evans)

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