National Company “KazMunayGas” JSC

(A joint stock company organised under the laws of Kazakhstan)

Offering of up to 30,505,974 Ordinary Shares
Offer Price: KZT 8,406 per Share
KMG – VALUATION REPORT
Based on Prospectus 2021
Financial information, bln KZT,
6M22 The Group intends to further develop traditional
business lines in the field of hydrocarbon production
Revenue 4,203
hydrocarbon production. At the same time, the Group is
Share in income of joint ventures 644 launching new production facilities in the oil refining
Net profit 677 business. is launching new production facilities. In
Free cash flow 188 particular, this year it is planned to launch a
polypropylene plant with a capacity of 500,000 tons.
Ratios and margins, 6M22 500,000 tons. And by 2026 and 2027. "KazMunayGas
plans to put into operation plants for production of
P/E, (x) 4.1x
butadiene and polyethylene. polyethylene. In addition,
EV/EBITDA, (x) 3.5x TCO is completing its expansion program and will
P/B, (x) 0.57x increase oil production by approximately 45% over the
ROA, (%) 4.6% next 2 years, which will significantly increase the
ROE, (%) 7.8% Group's cash flows.
EBITDA margin, (%) 24% This is the main reason, why it is expected that price
will increase 52%, valuation is that stocks are
undervalued as of 2022.
IPO parameters
Shares issued (mln shares) 610
Shares to be placed (mln shares) 30.5
Placement price (KZT) 8,406
Capitalization (billion KZT) 5,129
Capitalization (mln USD) 10,904
IPO volume (bln KZT) 256
KASE ticker KMGZ
Ticker AIX KMG
Investment horizon: 6-12 months.

Target price for 1 common share is KZT 12,800.

The price was calculated at the level of 12,800 tenge per one share, which
assumes a growth potential of 52% of the offering price. This target price represents the final
result of modeling our assumptions within the discounted cash flow (DCF) model. We also
additionally performed a comparative valuation, which resulted in a fair value of 9,800 tenge
per share.
Forecast Jun-
period model, 2021 Jan-Jul, Dec 2043
bln KZT F 22F 22F 2023F 2024F 2025F 2026F 2027F F PPP

EBITDA 872 524 502 929 882 992 942 792 438 394
EBITDA
margin 0,15 0,12 0,12 11% 11% 11% 11% 10% 22% 24%

EBIT 529 361 341 577 510 597 526 356 60 10

Operating
margin 9% 9% 8% 7% 6% 7% 6% 4% 3% 1%

(-) EBIT tax 68 115 102 119 105 71 12 2

( = ) NOРАТ 273 462 408 478 421 285 48 8

(-) net
reinvestments
(including
D&A) 69 147 92 119 86 30 (235) 4

СарЕх 237 465 473 508 511 484 148

change in
WC (7) 34 (9) 5 (8) (17) (5)

DD&A 161 352 372 394 417 436 378

( = ) FCFF 204 315 316 359 334 255 284 4

(x) discount
factor 0,96х 0,83х 0,72х 0,62х 0,54х 0,47х 0,05х

PV FCF 196 262 228 224 180 119 13

Capital valuation separately KMG, bln KZT

( = ) Cost in the forecast period 1 907
( = ) Value in the terminal period 1
( = ) EV 1 909
( + ) Cash and deposits with banks 1 742
(-) Debt (incl. operating lease) 3 730
(= ) Equity valuation -114
Equity valuation of shares in joint ventures, bln KZT
TSHO 3 543
KMG Kashagan 2 751
KTK 698
 MMG 592
Others 338
( = ) Total valuation of KMG, bln KZT 7 807
( = ) Final valuation of KMG, bln USD 16.4
Target price per share, KZT 12 800
Placement price, KZT 8 406
Growth potential, % 52%

Key points of the DCF valuation model.

Key to the valuation is the forecast oil price based on the forecasts provided by Bloomberg
analysts' forecasts. There is an assumption that a price of $99 USD/bbl. of oil for the second half
of 2022 with a further decline to $75-i USD per barrel in 2027. Then, in 2032. The forecast price
decreases to $70-i USD per barrel, and in 2037 – to $68-i USD per barrel, which roughly
corresponds to the average historical oil price in the 21st century. Historical average price of oil
in the 21st century. Also, an important point of the valuation is that it has valued KMG
separately, together with its consolidated subsidiaries and its consolidated subsidiaries, as well as
separately We have separately valued the following most significant joint ventures (not included
in the consolidation): "Tengizchevroil", CPC, KMG Kashagan and "Mangistaumunaigas" (94%
of profit from all joint ventures). The remaining joint ventures were valued through the Group's
implied price-earnings multiple, derived from the comparative valuation. Subsequently,
following the consolidation of KMG Kashagan due to the buy-back of the 50% shareholding this
company will not be valued separately.

Revenue.
The basis for calculating the revenues of all 5 companies is the price of oil crude oil price and
operating indicators such as oil production, transportation of crude oil and production of
petroleum products. To calculate revenues from the sale of oil and gas, we calculated the average
realized price of oil and gas sales price and the discount of this price to Brent. Further in our
forecasts we apply the historical discount rates to calculate forecasted revenues. For crude oil
production, we largely maintain current production volumes using production volumes
forecasted using the Group's own forecasts and historical data.
A special case in point is Tengiz, which is expected to grow to 40 mln tons of oil per year.
Production is expected to grow to 40 million tons of oil per year by 2025. Forecast
transportation volumes depend on oil production volumes. The length of the forecast period in
the valuation model depends on when 2P oil reserves for each producing company will run out.
In the case of KMG's separate valuation, we assume continued operation of the refineries into the
future. Therefore, we use a post-forecast period in this valuation model. As fields become
depleted, refining of petroleum products becomes less marginal. We also take into account in our
revenue forecasts volumes of oil resale, which is handled by the Group's trading company.

Operating Expenses.
The Group has two main types of operating expenses: cost of purchased crude oil and petroleum
products and production expenses. Production costs are mainly related to crude oil production
and production of petroleum products. That is, as the fields deplete, production costs will also
decrease. In addition, as the fields are depleted, we expect a decrease in the volume of oil resale,
which also reduces the cost of production. There are other operating expenses, such as selling
and transportation costs and general and administrative expenses, which are tied to revenues.
Operating expenses of upstream companies are linked to the level of oil production and increase
with inflation.
Valuation of interests in joint ventures.
We separately valued four companies: TCO, Kashagan, MMG and CPC. The valuation of all of
them, except MMG, was based on 2021 financial statements. It is worth noting that full
revaluation of TCO and CPC in the future will take place with some delay and only once a year.
In the case of Kashagan, we did not have confidential access to the financial statements.
However, the impact of this will be offset in the future by consolidation of financials once KMG
regains 100% ownership of KMG Kashagan N.V. Overall, the valuation of these companies was
standard in terms of approach, but they all have their own nuances. The valuation of CPC was
based on the report of CPC-K JSC, which has the same shareholders as CPC-R JSC, which owns
the pipeline. Since 100% of CPC-K's financials are broadly consistent with the Group's 20.75%
stake in CPC, we decided to value the company based on CPC-K's report. In addition, the Group
has several other smaller joint ventures that do not have a significant share in the Group's
earnings. We valued these companies using KMG's implied price-to-earnings multiple, derived
after the comparative method. After valuation, we applied a minority discount of 11.7-19.5% to
companies with less than 50% ownership (TCO, KMG, Kashagan, CPC), depending on the
ownership interest and the presence of a blocking stake. The main motivation here is that the
operating activities of these companies are not controlled by the Group. For example, the Group
does not have the full ability to influence the dividend policy of these companies. In addition,
these companies are very important to the Group, as the majority of the Group's profits and
dividends of the Group are generated in these companies, and the majority of the Groups of the
current valuation has been derived from these companies. The amount of discount was
determined on the basis of transactions in the energy sector over the last 10 years.

WACC Calculation
Cost of equity capital
Risk-free rate 4,20%
Market premium for equity capital 7,20%
Calculated beta coefficient 1,52
Total cost of equity capital 15,10%
Cost of borrowed capital
Cost of borrowed capital (before tax) 9,10%
Taxes 30,00%
Total cost of borrowed capital 6,40%
Capital structure
Equity capital 86%
Borrowed capital (D/(D+E)) 14%
 Weighted average cost of capital (WACC) 13,90%

Weighted average cost of capital.

The weighted average cost Capital (WACC) was calculated separately for each company. В
In the case of companies that generate only dollar cash flows (TCO, Kashagan, CPC), we used
dollar-denominated cash flows (TCO, Kashagan, CPC), we used a dollar-denominated WACC
taking into account country risk. WACC considering country risk. We also note that for CPC
Russia country risk was used. In cases with consolidated KMG and Mangistaumunaigas we used
partially tenge and partly dollar WACC, since these companies sell a significant portion of their
of oil sold by these companies on the domestic market.

Comparative valuation of
KMGs
Analogues by occupation EV/EBITDA, Capitalization,
(Integrated) Country Р/Е, 2025 2025 Р/8, 2025 Р/В billion USD
LUKOIL PJSC Russia 0,6х 47,8
ENI SPA Italy 6,9х 2,9х 0,5х 0,8х 41,6
SUNCOR ENERGY INC Canada 5,2х 3,7х 1,4х 1,5х 42,8
GAZPROM NEFT PJSC Russia 2,9х 2,3х 0,5х 0,8х 29,8
CENOVUS ENERGY
INC Canada 5,5х 3,8х 0,8х 1,8х 32,7
PTT PCL Thailand 8,3х 0,4х 0,9х 25,9
IMPERIAL OIL LTD Canada 6,9х 5,0х 1,0х 1,9х 29,1
OIL & NATURAL GAS
CORP LTD India 0,3х 0,6х 19,6
ECOPETROL SA Colombia 4,4х 3,9х 0,8х 1,3х 18,9
REPSOL SA Spain 5,3х 2,9х 0,4х 0,8х 18,2
SURGUTNEFTEGAS
PJSC Russia 0,1х 11,3
GUANGHUI ENERGY
CO LTD-A China 3,4х 11,2
OMV AG Austria 5,4х 3,9х 0,5х 0,8х 12,9
GALP ENERGIA SGPS
SA Portugal 7,0х 3,5х 0,4х 2,1х 7,9
POLSKIE GORNICTWO
NAFTOWE 1 Poland 0,6х 5,6
YPF S.A.-D Argentina 2,7х 0,7х 5,6
MOL HUNGARIAN OIL
AND GAS PL Hungary 2,7х 0,3х 0,5х 4,8
OMV PETROM SA Romania 1,5х 0,7х 0,7х 4,8
Median of analogs 5,4х 3,2х 0,5х 0,8х 18,5
Financial indicators, bln Capital,
KZT, 2025 Profit EBITDA Revenue 2021 Net debt
KMG 1 631 2 571 10 307 8 926 2 618
 Comparative valuation of KMGs
Estimated separately, bln KZT P/E EV/EBITDA P/S P/B
KMG 8 854 5 599 4 838 7 262
Separate valuation, bln USD P/E EV/EBITDA P/S P/B
KMG 18,6 11,8 10,2 15,3
Weight 10% 80% 5% 5%
Total valuation, bln USD 12,6
Total valuation, bln KZT 5 969
Total valuation per share, KZT 9 800

Comparative valuation.
We also valued the Group using the comparative method. For this purpose, we took 18 vertically
integrated companies with market capitalization from $4.8 to 48 bln USD.
The main weight in the valuation was given to the EV/EBITDA ratio of 80%, which is the most
appropriate for oil and gas valuation. as the most appropriate for the valuation of oil and gas
companies. The other ratios received the following weights: P/E (10%), P/S (5%), P/B
(5%). All these ratios, except for P/B, were used in the forward for the year 2025. That is, we
used the forward-looking market assessment of these financial indicators of the peers, and also
used our own forecasts of the Group's financial indicators, obtained using the DCF method. As a
result, using this method our estimate amounted to KZT 5.97 trln or KZT 9,800 per share.

Conclusion.
As a result, we valued KazMunaiGas using DCF method based on forecasted discounted cash
flows. We note that the presence of large and developed oil and gas assets allow the Group to
generate cash flows for many years. Cash flows for many years. In addition, the Group has
significant potential for growth of operating and financial indicators on the back of oil
production growth and operating and financial indicators on the back of oil production growth
and launch of production facilities in the petrochemical sector. petrochemical facilities.
Nevertheless, it should be noted that the activities of "KazMunayGas' activities are highly
dependent on oil prices, and the history with the Russian sanctions may still have a negative
impact on the Group in case of worst-case scenarios. Group in case of development of worst-case
scenarios.

Risk factors
Crude oil prices
Company’s revenue and net income fluctuates with changes in crude oil prices. Historically,
Brent Crude oil, CPC Blend (Caspian Pipeline Consortium) and other crude oil prices are highly
volatile. Oil prices determined by global demand and supply of oil, geopolitical factors such as
Russian Ukrainian, Middle East conflicts. Crude oil prices influence KMG’s revenues in various
forms including regional and global demand for oil and petroleum products, socioeconomic
conditions, global pandemic, access to Caspian Pipeline Consortium and other ways of
transportation of oil products, availability and prices of substitutes, production levels of OPEC
members, speculative activities and market uncertainty.
 Brent Crude oil average annual spot price
120 106.92
100
80 70.86
64.3
60 41.96
40
20
0
2019 2020 2021 2022
Source: Refinitiv Eikon
Decline in oil prices or reduction of production volumes result in decrease of revenue, net
income, consequently free cash flows and negatively result in investment in capital expenditures
necessary for further development.
Capital-intensive industry
The industry is capital-intensive. Oil and gas industry requires CAPEX for maintenance, such as
development, production, transportation, compliance with environmental law and refining. Since
there is no assurance of generating sufficient cash flows to fund growth, KazMunayGas expects
that majority of CAPEX will go to maintenance, short term and medium term commitments.
Capital expenditures consist of exploration and production of oil and gas segment (52.6%), oil
and gas transportation (20.7%), the refining and trading of crude oil and refined oil products
(20.2%). A Company also has commitments under subsoil use contracts signed with government.
It includes certain investment in CAPEX and OPEX until FY2048.
CAPE
Year (KZT Million) X OPEX
2022 179505 14477
2023 110943 4310
2024 32408 4324
2025 14217 4275
2025-2048 3038 21957
Total 340111 49343
Source: Prospectus in respect of Notes issued by JSC KazMunayGas
Government policy and regulations.
On a monthly basis, the government determines the volume of domestic oil supply in order to
meet domestic energy requirements. If government does increase the quota of supply for
domestic market over the current level, the company will generate less revenue on its upstream
sector (exploration and production). Beside oil supply requirements, KazMunayGas has
requirements on natural gas prices, which historically been lower than cost of production. After
the protests in January 2022 government stopped over the counter trading of LPG (Liquefied
petroleum gas) and established strict regulations for increasing domestic supply of LPG. In
accordance with regulations meeting domestic supply requirements of oil and gas is a high
priority for KMG.
Competitors
Internationally oil and gas sector is a highly competitive environment for business to operate.
Many of KMG’s competitors are international companies with substantial proved resources and
quality of refined products. As well as companies with newly discovered oil reserves number of
competitors is increasing. Operating in commodity market excludes capacity for product
differentiation. The focus is on price of the products, which imposes significant challenge.
KMG’s downstream operations at risk as well because competitors’ refinery plant geographical
location.
Environmental risk and sustainability
KMG’s upstream, midstream, downstream operations are a subject to environmental risk. The
Group’s primary environmental liabilities include land contamination, gas flaring, wastewater
disposal and oil spills. In accordance with Environmental Code, “polluter pays” principle
requires elimination of environmental damage and dramatic increase in environmental offenses
fines. Oil and gas production plants are category I facilities according to Environmental Code
and have obligations to pay the negative environmental impact fees. The Code extended statute
of limitations period to 30 years for claims relating the damage. Environmental authorities of
Kazakhstan fined Embamunaigas for 1.2 billion tenge in FY2020. Institutional investors are
more concerned about sustainability issues and aimed to invest in renewable energy investments.
Mature production fields
More than half of KMG’s proved reserves are mature, which means the company wont be able to
sustain current level of upstream revenues in the long-term. Development of new wells and
projects will incur substantial capital expenditures. These projects will require new technologies
for advanced methods of extracting reserves. However, there is such tax incentives regarding
some fields. The tax rate decreased to 2.6% for some reserves until FY2036.
Proved reserves estimation
There are various uncertainties in calculation of oil current reserves and its future projections and
estimations. Estimation of different experts vary and calculating quantity of reserves is
subjective matter. The information available and ability to verify that data against industry
standards, accuracy of assumption made during estimation of reserves may influence quantity of
oil and gas and revenue streams as well.
 ExxonMobil. Based on Equity Report 2021

In this report the following valuation methods used:

1. FCFF SoP (Base Valuation Model): ExxonMobil employed Free Cash Flow to the Firm
– Sum of the Parts valuation model. This model is based on discounted cash flows and
takes into consideration various segments of the company's business. The data for this
analysis were sourced from ExxonMobil's annual financial reports available on the
official ExxonMobil website (see below).

Enterprise Value Structure: The analysis reveals that a significant portion of ExxonMobil's
enterprise value is attributed to the Upstream segment (exploration and production), accounting
for approximately 58% of the total enterprise value, followed by the Downstream (refining)
segment at 22% and the Chemicals segment at 14%.

 The Free Cash Flow to the Firm – Sum of the Parts (FCFF SoP) valuation method is
commonly used in the assessment of oil and gas companies due to the complex and
multi-industry nature of this sector. Here the reasons:
  Multiple Business Segments: oil companies typically have diverse business segments,
including raw material extraction, refining, distribution, and marketing. Each of these
segments may have different cash flows and capital structures. The FCFF SoP method
enables analysts to disaggregate the company into separate segments and assess their
individual values, subsequently summing them up.
 Varied Risks: different segments within oil companies may be exposed to distinct risks.
For instance, oil extraction may face price and operational risks, while the refining
segment may depend on margins and demand for petroleum products. The FCFF SoP
method allows for the consideration of these risk disparities in the valuation.
 Segment-by-Segment Evaluation: since oil companies often possess diverse assets and
projects in various regions and countries, FCFF SoP permits analysts to evaluate each
part of the company individually more accurately and account for factors such as
geographical variations in markets and risks.

Key Aspects for Evaluating FCFF (Free Cash Flow to the Firm) Sum of the Parts (SoP):
 Commodity Prices and Realization: commodity prices, such as Brent oil prices (see
Figure 58) and Henry Hub natural gas prices (see Figure 59), are critical factors
influencing revenue growth. Price projections for oil and gas are based on data from EIU
(Economist Intelligence Unit) and are expected to undergo changes in accordance with
forecasts.

 Margins in Refining and Chemical Industries: Margins in the refining and chemical
industries are intricately linked to commodity prices. Margin stability is anticipated in
refining, while margin fluctuations in the chemical industry are expected to depend on oil
and chemical product prices (see Figure 60).
 Production Growth in Business Segments: the analysis of production growth in various
business segments was conducted based on projects.
It is expected that Upstream production will increase due to projects in the Permian
Basin, Guyana, and the expansion of the LNG portfolio. However, revisions to forecasts
are possible, taking into account the company's record of accomplishment in achieving
production targets (see Appendix 2.3).

 Regarding the Downstream segment, an increase in refining capacity is expected, rising

from 3,773 thousand barrels per day to 4,375 thousand barrels per day during the period
from 2020 to 2025, corresponding to a CAGR of 3%. This growth is driven by the
anticipated expansion of refining capacity from 4,775 thousand barrels to 5,058 thousand
barrels over the same period, representing a CAGR of 1.2%, as well as an increase in
capacity utilization from 79% to an average level of 87% (see Figure 62).

 Regarding the Chemicals segment, a CAGR (Compound Annual Growth Rate) of 6.4%
in sales of key products is expected from 2020 to 2025, considering: i) the anticipated
CAGR in production capacity from 28.2 million metric tons per year to 36.9 million
 metric tons per year and ii) an improvement in capacity utilization from 85.4% to 90.6%
(see Figure 63).

 Discount Rate WACC: Cost of Equity Evaluation: the cost of equity was determined
using CAPM, considering the following components:
 Risk-Free Rate: 1.28%, corresponding to the yield of 10-year U.S. Treasury Bonds.
 Market Risk Premium: approximately 6%, based on 2021 data from Fernandez, adjusted
for the aforementioned risk-free rate and the absence of sovereign bond default risk,
given the company's location in the United States.
 Unlevered Betas, adjusted for cash holdings for each business segment, derived from the
pure-play method and industry benchmark comparisons.
 Integrated Beta Determination: an integrated approach to beta determination was
employed, using a regression methodology with the S&P 500 index, applying the Blume
adjustment. This approach yielded a leveraged beta of 1.26.
 Cost of Debt: the cost of debt was 1.91%, determined using the Default Risk Model,
taking into account the estimated company's credit spread of 0.63%.
 Long-Term Sustainable Growth Rate and Terminal Value: for terminal value calculation,
a long-term sustainable growth rate reflecting forecasts for oil and gas demand growth
was established at 2.55%.
 Long-Term Sustainable Growth Rate and Terminal Value: the second stage of the DCF
analysis includes an infinite period, in which ExxonMobil's terminal value was
determined using a stable growth model. The following steps were also carried out: i)
normalization of Free Cash Flows to the Firm (FCFF) and ii) determination of the long-
term sustainable growth rate.
 Normalization of Cash Flows: the normalized value of NOPAT (Net Operating Profit
After Tax) was determined to adjust FCFF for business cycle fluctuations and provide
cash flows at the midpoint of the cycle. This normalization was conducted using linear
regression from 2018 to 2025 for NOPAT (see Appendix 6.7).

 Long-Term Sustainable Growth Rate (g): the growth rate of g%, amounting to 2.55%,
was determined by considering the weighted CAGR (Compound Annual Growth Rate) of
oil and gas demand in the oil mix from 2025 to 2040, adjusted for inflation.
2. Free Cash Flow to the Firm (FCFF) – Integrated Approach: applying the same DCF
methodology, an assessment of the entire ExxonMobil company was conducted. The
WACC rate was adjusted to 7.6% to account for cooperation in the integrated business,
resulting in a target stock price by the end of 2022 of $75.5 (see Appendix 6.5).

 Cash Flow to Equity (FTE): to complement the FCFF methodology, an evaluation was
performed using the FTE model. Utilizing a long-term capital rate of 8.9%, this model
predicts a target stock price by the end of 2022 of $78.7. The results of this model align
with the FCFF model (see Appendix 6.8).

 Capital Cash Flow (CCF): the CCF model was determined to complement the FCFF
methodology, yielding a target stock price by the end of 2022 of $75.4, which closely
approximates the FCFF results (see Appendix 6.9). This model also determined the pre-
tax Weighted Average Cost of Capital (Pre-tax WACC) at 6.1%.
 Dividend Discount Model (DDM): considering ExxonMobil's consistent history of
dividend increases over the past decades, as well as the company's decision to increase
debt and maintain dividends during the COVID-19 crisis, the DDM model was
employed. Initially, cash flows related to dividends were determined, followed by the
application of the H-Model to ascertain the long-term dividend growth rate. According to
this model, the target stock price for ExxonMobil by the end of 2022 is estimated at $75.6
(see Figure 66).

 Net Asset Value (NAV) for the Upstream Segment and FCFF SoP for the Downstream
and Chemicals Segments: to account for the unique valuation characteristics of oil and
gas companies, NAV and FCFF SoP models were utilized. NAV assesses the value of
assets at the individual asset level and based on forecasts, determines the total company
value at the end of the assessment. The model assumes no capital expenditures and
 reinvestments except for expenses related to the development of proven undeveloped
reserves. It assesses only cash flows associated with oil and gas production and does not
assume infinite growth, as production occurs as long as there are proven reserves. As for
the Downstream and Chemicals segments, the previously defined FCFF SoP model was
employed. Using this model, the target stock price for ExxonMobil by the end of 2022
was determined to be $75 (see Appendix 6.11).

3. The Multiples-Based Valuation (MBV) method was employed for assessing

ExxonMobil; however, it was ultimately rejected due to certain limitations. Let us delve
into how this method was applied and why it was not considered relevant for evaluating
ExxonMobil.
Peer Group Selection: to begin with, a peer group of comparable analog companies was
chosen to benchmark ExxonMobil against similar industry players (see Table 10).

Selection of Multiples and Specific Metrics for Oil and Gas Companies: in addition to
standard price and EV to EBITDA multiples, specific multiples applicable to oil and gas
 companies exist. In this case, the following specific multiples were utilized:
EV/EBITDAX, EV/DACF, EV/Proved Reserves, and EV/Daily Production (see Figure
68).

Investment Risks in the Oil Industry According to ExxonMobil

Oil Price Risks: one of the primary risks for the oil industry in 2021 was significant fluctuations
in oil prices. The industry is highly dependent on oil prices, and any price decline can have a
negative impact on company profitability (see Figure 56).
Environmental Risks: oil spills remained a significant risk for oil companies. Despite
precautionary measures, oil companies are always susceptible to potential accidents and oil
spills, which can lead to serious environmental consequences and legal liabilities (see Figure 78).

ESG Risks: in 2021, it became evident that investors and the public are increasingly focusing on
environmental, social, and governance issues. If a company like ExxonMobil does not pay
sufficient attention to these aspects and does not implement measures to mitigate ESG risks, it
can negatively affect its reputation and investment attractiveness (see Figure 80).
Competitive Risks: In 2021, the oil industry continued to face competition from alternative
energy sources such as solar and wind energy, as well as increased efforts to reduce dependence
on oil and gas.
Political and Regulatory Risks: Changes in politics and regulation can also impact the operations
of oil companies. In 2021, there was tightening of environmental and climate regulations, which
could potentially increase compliance costs.
 Royal Dutch Shell. Based on Equity Report 2020.

This report serves the following purposes:

 Analysis and Evaluation of Royal Dutch Shell as an Investment Opportunity: the report
provides an analysis and assessment of Shell as a potential investment opportunity.
 Providing Information about the Company's Current State: the report contains
information about the current state of the company, including its business model,
financial performance, and prospects for potential investors.
 Investment Recommendations: the report includes recommendations on whether to buy,
sell, or hold Shell stocks, as well as a year-end target price.
 Analysis of Factors Influencing Recommendations: the report also describes factors
influencing the recommendations, such as market conditions, economic trends, and the
company's environmental initiatives.
 Assisting Investors in Making Informed Decisions: ultimately, the report aims to assist
investors in making informed decisions regarding their investments in Shell.

According to our model, the key factors influencing the assessment of Shell include:
 Commodity Prices (see Figure 42).
 WACC.
 Production Growth Rate (see Figure 41).

1. Cost of Equity Assessment:

 To calculate the cost of equity, the risk-free rate for 10-year U.S. bonds, which was
0.55%, was utilized. This choice is attributed to the fact that market rates were
historically low, and medium-term forecasts align with a low-rate environment for an
extended period. The consideration of the U.S. risk-free rate was chosen because Shell's
debt is issued in USD.
For beta, a regression analysis of Shell's stock prices relative to the MSCI ACWI index
was conducted. To enhance accuracy, the beta value was adjusted using the Blume
method (see Appendix 12).

Summarizing all the data, the average weighted risk premium was calculated at 10.7%.
By computing all the data, the cost of equity was determined to be 10.94% (see Appendix
12).
 Historical debt cost for Shell, which amounted to 4.62%, was employed to calculate the
cost of debt (see Appendix 14).

In the end, the appropriate WACC rate for discounting FCFF (Free Cash Flow to the Firm)
was determined to be 9.1% (see Table 5).
2. Free Cash Flow to Equity Model:
Through the DCF FCFE (Free Cash Flow to Equity) method, a target value of $33.38 was
obtained at the end of 2021. The Flow to Equity model is more suitable when the capital
structure is stable.
However, in the long term, the capital structure typically approaches the structure of the
base year, but in 2020, a significant change in the company's debt metrics is expected.
Debt is increasing and remains above the baseline level. Therefore, this method is not the
best for valuing Shell (see Figure 43).
3. Total Payout Model
 Shell prioritizes dividend payments and share buybacks. In 2020, due to the collapse in
oil demand and commodity prices, these payouts were at risk, but the forecast assumes
that both share buybacks and dividend growth will resume in the coming years (see
Appendix 21).
  An H-model was used for the assessment. In the first stage, future cash flows for
shareholders were estimated. Total payouts from an investor's perspective, including both
dividends and share buybacks, were considered. In the second stage, a 10-year period was
assumed (aligned with the expected peak in oil demand) during which shareholder
incomes would grow at a higher rate of 3.4% (the world GDP growth rate), and after this
period, incomes would converge to the company's long-term sustainable growth rate of
0.73%, calculated using the PRAT model for sustainable dividend growth (see Appendix
18).

4. Market-Based Valuation

In addition to DCF models, the valuation of Shell was also conducted using comparative
methods with its competitors. The following multiples were used (see Table 6):

 EV/EBITDA is a multiple that compares a company's market value (EV) to its earnings
before interest, taxes, depreciation, and amortization (EBITDA). It is used to assess a
company's value.
  The market value of this multiple is 5.74. Applied to Shell's financial results, this yielded
an enterprise valuation of $213,162 million, corresponding to an equity value of
$126,349 million or a target price of $32.38 per ADS share by the end of 2021.
 This multiple is particularly suitable for companies operating in capital-intensive
industries, where significant depreciation and amortization expenses are common.
 EV/EBIT is another multiple that compares a company's market value (EV) to its
earnings before interest and taxes (EBIT). It is used for valuing a company.
 The median EV/EBIT for Shell's competitors is 16.04. Applied to Shell, this resulted in
an enterprise valuation of $190,366 million, corresponding to an adjusted equity value of
$103,553 million or a target price of $26.54 per ADS share by the end of 2021.
 This multiple is more suitable for companies where depreciation and amortization are not
significant expense items, which is not the case with Shell.
 P/E is the ratio of a stock's price to its earnings per share (EPS). It is one of the most
common multiples used in stock valuation.
 The median P/E for Shell's competitors is 19.6. Applied to Shell, this resulted in an
equity valuation of $107,826 million or a target price of $27.63 per ADS share by the end
of 2021.
 However, the P/E multiple often has low reliability, especially when earnings are heavily
impacted by write-offs.

Investment Risks in the Oil Industry According to Shell:

Royal Dutch Shell, as a major global company, is exposed to various risks that can have a
significant negative impact, both individually and in combination, on its financial condition:

 Macroeconomic Risks:
Slowing global GDP growth and reduced demand for oil and gas can strongly affect
Shell's profitability.
 This year, a negative financial outcome is expected due to a 4.9% reduction in GDP and
the impact of the second wave of COVID-19 with subsequent lockdowns and reduced
energy demand.
 Market and Financial Risks:
 Volatility and a decrease in oil and natural gas prices can negatively affect Shell's
operating results, despite the use of derivatives to mitigate market risks.
 Environmental Risks:
Natural disasters and climate change can lead to production interruptions and
environmental damage (see Figure 50).

 Operational Risks:
 Safety – major accidents or spills can result in loss of life, environmental damage,
regulatory fines, and reputational losses.
 Energy transition and changes in the energy landscape also pose operational risks.
 Resource Risks:
 Changes in oil and gas reserve estimates can impact Shell's future production and
operations.
 Political Risks:
 Political instability and changes in legislation and regulatory requirements can affect
Shell's supply chain and operations (see Figure 51).
Conclusion and recommendation

In conclusion, while valuing companies within oil and gas sector intrinsic valuation and relative
valuation approaches are primarily used. For KazMunayGas, which operates in emerging market
it is essential to strengthen discounted cash flow model with strong assumptions. For mature,
cash flow generating company operating in emerging market, discounted cash flow valuation is a
perfect tool for estimating intrinsic value and risks associated with the business. Three-stage Free
Cash Flow to the Firm Valuation method applied because the company is having substantial
growth and expected to maintain this rate for a period, after which the growth rate expected to
decline due to depletion of oil and gas resources. Gradual decline in growth can reflect global
decarbonization trend and expected reduction of supply and demand in the upstream sector. Free
Cash Flow method is also reinforced by KazMunayGas’ unstable and high leverage due to
capital intensive nature of oil and gas industry.
Utilization of relative valuation is valid as well, since the purpose of KMG valuation was initial
public offering. In such cases relative valuation is more likely to reflect market moods and
perceptions, that can be an advantage in selling the stocks at a certain price at the time of IPO.
Application of historical PE ratio in combination with forward looking indicators gives us more
broad picture of the value both on present and future earning generating ability. However it is
more important to know the distribution of our multiples and relationships between multiples and
fundamentals, which are never linear. It is important to see the distribution of multiples to throw
out outliers and to know the average for the industry and standard deviation of distribution.
 PE ratios for oil and gas companies, January 2023
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Historic P/E Excl Extra, Basic, FY Price / EPS (Mean Estimate)

(FY0) (FY1)

Source: Refinitiv Workspace

For instance, we took PE ratio for KazMunayGas peer group and found median (5.12), Standard
deviation (2.11). However the relationships between the fundamentals and multiples are not
always linear. That’s why we can conduct regression analysis.

SUMMARY OUTPUT

Regression Statistics
0,84595691
Multiple R 7
0,71564310
R Square 6
0,63033603
Adjusted R Square 8
1,32776191
Standard Error 9
Observations 14

ANOVA
df SS
Regression 3 44,36833666
Residual 10 17,62951713
Total 13 61,99785379

Standard
Coefficients Error
2,81162360
Intercept 7 1,349396314
 Earnings Per Share - Mean Growth (This Yr/Last 7,64662634
Yr) 7 1,845425462
2,28223006
Beta 9 0,742348439
Dividend Payout Ratio, % 4,86933060
(FY0) 5 2,240962849

Given the regression analysis we can conclude that R-squared is 0.715643106, and it tells you
the proportion of the variance in the dependent variable that can be explained by the independent
variables. In this case, approximately 71.56% of the variance in the dependent variable can be
explained by the independent variables.
Adjusted R-squared (Adjusted R²) is 0.630336038. It adjusts R-squared for the number of
independent variables, considering model complexity. This value is slightly lower than R-
squared because it accounts for the number of predictors.
Regression analysis gives us the following equation:

PE = 2.811623607+7.646626347EPS +2.282230069Beta+4.869330605Payot Ratio

Given the equation our estimated PE Ratio is 6.84355664, actual PE ratio is 4.46307, which is
lower than estimated. We can say that KazMunayGas is undervalued given its fundamentals. The
closing price end FY2022 was 9499 tenge per share.
As Exxon and Royal Dutch Shell are operating in Europe and North America with global
presence, discounted cash flow method and market approach were used. For analysts in mature
markets in which Exxon and Shell operates it is easier and safer to use relative valuation, since it
requires less data. Its assumptions are hidden and internal.
Exxon Mobil uses discounted free cash flow to the firm two-stage model, its advantages are
sector differentiation, as well as KMG model.