Cross-Listing Of Exploration & Production Kazmunaigas Jsc

Outline:

1. Executive summary 3

2. Acknowledgements

4

3 Introduction 5

3.1. Objectives 5

3.2. Methodology 5

3.3. Scope 5

3.4. Limitations 5

3.5. Literature review 5

4. Findings and Analysis 6

4.1. Oil and Gas industry overview and outlook 6

4.2. EP KazMunayGas company 7

4.3. IPO on LSE and KASE 9

4.3.1. Reasons for IPO on LSE and KASE 9

4.3.2. Process of IPO for EP KazMunayGas 10

4.3.3. After the IPO 11

5. Analysis of EP KazMunayGas cross-listing 12

5.1. Stock Price on KASE versus stock price on LSE 12

5.2. Identification and analysis of arbitrage opportunities between two stock exchanges 17

5.3. Results of Eviews and Granger tests

22

6. Conclusion 25

7. Literature Review 26

1. Executive summary

Cross-listing of Exploration & Production KazMunaiGas JSC between LSE and KASE

The IPO is becoming more important for local companies in Kazakhstan, since it provides more perspective opportunities and the access to international financing. EP KazMunayGaz was a pioneer among Kazakhstani companies to have its stock listed at LSE. The main objective of this research is to define whether there are arbitrage opportunities due to exchange rate fluctuation, time difference or market inefficiency and to identify whether there is a dependency between the company’s stock price at KASE and LSE.

The correlation of the stock prices at KASE and LSE is high, but it cannot be the only estimator of dependency between two prices, i.e. we cannot define whether the changes in prices at KASE impact the LSE prices or the reverse. Thus, in our research we have also used Eviews 3.0 and conducted Granger test. Since the source of arbitrage opportunities may be related to exchange rate fluctuations, we have also used the exchange rates.

There are a couple of points during the last year since IPO where prices on KASE and LSE fluctuated around 5%. Thus, there were opportunities for arbitrage by buying stocks of EP KazMunayGas on one exchange and selling them on another and making a profit. The drawbacks of this is that in order to exchange one stock for a GDR, it will take approximately two weeks plus there are commissions for broker, custodian and Bank of New York. Besides GDR is a more liquid, so by the time stock is converted to GDR, the stock prices might equal out and there will be no opportunity for arbitrage.

3. Introduction

3.1 Objectives вЂ" EP KazMunayGas was the first national company of Kazakhstan to enter and trade on London Stock Exchange, thus the goal of this paper will be to compare the listing of this company on LSE and KASE, identify the reasons behind the cross listing and benefits to the company, analyze the prices of stocks on both exchanges, see whether there are arbitrage opportunities to benefit from cross-listing rates.

3.2 Methodology вЂ" We will use the share price data from LSE and KASE to compare and analyze the difference in stock prices. Thus, we will be using primary and secondary data and articles, research to explain the reasons for the cross-listing.

3.3 Scope вЂ" We will look at stock prices from September 29, 2006 when EP KazMunayGas was listed on LSE and exchange rates of KZT versus USD.

3.4 Limitations вЂ" Reasons behind the difference between stock prices on LSE and KASE might not all be discovered, as they can include insider’s information that will not be available to the public.

3.5 Significance вЂ" The traditional argument within the academic literature to cross-list abroad in addition to a listing in the domestic country is that firms seek such opportunities to benefit from a lower cost of capital that arises because their shares become more accessible to global investors whose access would otherwise be restricted because of international investment barriers. Cross-listing may also be driven by marketing considerations; for example, to increase visibility with customers by broadening product identification, and to improve labor relations in foreign countries by introducing share and option plans for foreign employees. There are, however, also disadvantages in deciding to cross-list: increased pressure on executives due to closer public scrutiny; increased reporting and disclosure requirements and additional listing fees.

We want to understand the reasons why EP KazMunayGas decided to cross list on LSE and KASE, analyze the results they received from it after a year, review arbitrage opportunities and define whether there is a dependency between the prices at KASE and prices at LSE.

4. Findings and Analysis

4.1 Oil and Gas industry overview and outlook

The oil and gas industry of Kazakhstan occupies a significant position within the country's industrial structure. Kazakhstan is well known for its oil and gas reserves. They are believed to provide a reliable basis for the development of the oil-and-gas complex, and for the replenishment and increase of Kazakhstan's wealth. There are more than 200 oil and gas fields in the Republic. The predicted extractable resources of oil are estimated to be 7.8 billion tons, and those of natural gas 7.1 billions m3. About 70% of these reserves are massed in the western oblasts of Kazakhstan, and the overwhelming part of the resources are associated with salt fields and lie at depths of over five thousand meters.

The predicted resources of the Kazakhstan sector of the Caspian shelf are estimated to be around 13.0 billion tons of standard fuel, however