TEXT-S&P summary: China National Offshore Oil Corp.
(The following statement was released by the rating agency)
Nov 29 -
Summary analysis -- China National Offshore Oil Corp. ------------- 29-Nov-2012
CREDIT RATING: AA-/Stable/-- Country: China
Primary SIC: Oil and gas
Credit Rating History:
Local currency Foreign currency
16-Dec-2010 AA-/-- AA-/--
31-Jul-2008 A+/-- A+/--
The long-term corporate credit rating on China National Offshore Oil Corp. (CNOOC) reflects the company's strong stand-alone credit profile (SACP), and Standard & Poor's opinion that there is an "extremely high" likelihood that the People's Republic of China government (AA-/Stable/A-1+; cnAAA/cnA-1+) would provide sufficient and timely extraordinary support to CNOOC in the event of financial distress. We assess CNOOC's SACP to be 'a', which reflects the company's strong business risk profile and modest financial risk profile.
CNOOC is one of three government wholly owned oil companies in China. In accordance with our criteria for government-related entities, our view of an "extremely high" likelihood of extraordinary government support is based on our assessment of CNOOC's following characteristics:
-- "Critical" role to the government as it plays a key role in helping the government ensure a secure supply of energy to meet growing domestic demand. Very limited private ownership in the oil and gas industry in China solidifies CNOOC's critical role.
-- "Very strong" link to the government. The Chinese government directly owns 100% of the company through State Assets Supervision and Administration Commission (SASAC). The government is unlikely to dilute its ownership in the next five years. In our view, the government is able to exert a strong influence on the company through the appointment of senior management. SASAC monitors the company's performance.
CNOOC's stand-alone credit profile is supported by the credit profile of its core subsidiary CNOOC Ltd. (AA-/Stable/--; cnAAA/--). CNOOC Ltd.'s credit profile is underpinned by its competitive cost structure, dominant market position in offshore China, and good long-term production growth track record. These strengths are moderated by the company's exposure to volatility in oil and gas prices, its growing exposure to regions with higher sovereign risk, and its aggressive growth appetite, as shown by its large capital expenditure (capex) program and growing appetite for acquisitions.
CNOOC's SACP also takes into account the benefits the company derives from the gradual integration of its operations. Nonetheless, the company continues to face execution risks and significant capex requirements of its non-exploration and production (E&P) businesses, including oil field services, offshore engineering, petrochemicals, refining and marketing, and liquefied natural gas (LNG) operations.
While we believe CNOOC is taking significant steps toward becoming a global integrated energy company, its core business remains E&P. Nonetheless, the group continues to invest in non-E&P businesses mainly through new projects. By the end of 2011, non-E&P businesses accounted for about 51% of the group's total assets. However, most of these investments command lower returns than those of its E&P businesses in the current price environment (non-E&P business accounted for only 25% of the group's net profit before tax at the end of 2011). While the company has become a leading player in the country's fast-developing LNG business, its market position in refining, marketing and petrochemicals is still lagging behind that of China National Petroleum Corp. (AA-/Stable/--; cnAAA/--) and China Petrochemical Corp. (A+/Stable/--; cnAAA/--).
The group's financial performance is solid and within our expectation. Its E&P business benefited from high realized oil prices in 2011 and the first six months of 2012, more than offset relative weak performance of the refining and petrochemical business due to weak market conditions during the first six months of 2012. That said, the group's fast expansion has resulted in materially increase in total debt. As of June 30, 2012, its total consolidated debt increased to Chinese renminbi (RMB) 115 billion from RMB31.95 billion at the end of 2005. Nevertheless, the company is modestly geared, with ratios of total debt to total capital of 21.0% and total debt to EBITDA of 0.8x. We expect the refining business to perform better in the second half of 2012, which along with expected strong performance of CNOOC Ltd would lead to a strong financial performance in 2012.
In our view, CNOOC's liquidity is strong, as defined by our criteria. While short-term debt accounts for about 35% of its total debts, the amount is still manageable for CNOOC. Our assessment of CNOOC's liquidity profile incorporates the following expectations and assumptions:
-- We expect the company's liquidity sources over the next 12- 18 months to exceed its uses by more than 1.5x.
-- Even if EBITDA declines by 30%, we believe net sources would remain positive.
-- The company has minimum covenants in its outstanding borrowings.
-- The company has solid relationships with its banks, and has a good standing in the credit markets.
Liquidity sources include cash and equivalent of RMB104 billion (as of Dec. 31, 2011), our projected cash flow from operations of RMB100 billion-RMB105 billion in 2012 and US$2 billion of guaranteed notes raised in first half of 2012 by CNOOC Ltd. Liquidity uses include debt maturities within one year of RMB38.0 billion, projected capital expenditure of RMB70 billion, potential acquisitions of RMB15 billion, and projected dividend payments of RMB18 billion.
The stable rating outlook on CNOOC reflects the outlook on the sovereign rating.
We may raise the rating on CNOOC if the sovereign rating on China is raised. In a highly improbable scenario, in our view, we could lower the rating if the government reduces its support to CNOOC because of a change in the government's strategies or priorities. We could also lower the rating if the company's SACP deteriorates. This could happen if CNOOC or its subsidiary becomes more aggressive in terms of acquisitions, or CNOOC aggressively boosts its capital spending program in the non-E&P businesses, such that its ratio of total debt to total capital increases to more than 30%.