RPT-Fitch Affirms China Oilfield Services at 'A'; Outlook Stable
Oct 11 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed China Oilfield Services Limited's (COSL) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'A'. The Outlook is Stable.Simultaneously, Fitch has also affirmed the 'A' rating of the senior unsecured notes issued by COSL Finance (BVI) Limited (100% held by COSL) and guaranteed by COSL.
COSL's ratings are closely aligned with the credit profile of its parent, wholly state-owned China National Offshore Oil Corporation (CNOOC), which owns 53.6% of COSL. This is due to the strong strategic and operational linkages between the two companies, and the tangible support COSL has received from CNOOC, based on Fitch Ratings' Parent and Subsidiary Rating Linkage methodology.
KEY RATING DRIVERS
Importance to CNOOC: COSL's integrated oilfield service model provides significant efficiencies and cost savings to CNOOC. COSL is the largest and most integrated offshore oilfield services provider in China. It has consistently accounted for nearly 90% of the drilling services requirements of CNOOC, specifically those of CNOOC's upstream subsidiary CNOOC Limited ('A+'/Stable), as well as the bulk of its well services and geophysical and marine support service requirements offshore.
Stability of Cash Flow: The relationship with CNOOC benefits COSL because of strong utilisation rates for its assets in China, and this translates into stability and visibility of earnings. COSL has generated around 60% of its revenue from CNOOC. COSL's shallow-water operations will generate strong cash flow and asset utilisation in the medium term, considering CNOOC's reserve life and discoveries in the shallow waters of China. Fitch expects revenue from COSL's international business (about 35% of total revenue in H113) to expand faster than revenue from CNOOC, which will result in CNOOC's contribution to COSL declining gradually, though it is likely to remain at at least 50% in the medium term.
Strong Credit Metrics: COSL has robust credit metrics and sound liquidity. Its net debt/operating EBITDAR was 2.7x in 2012 (H113 annualized: around 2.3x) and operating EBITDAR fixed charge coverage was 8.1x. Fitch estimates it had cash equivalent balances of CNY10bn at June 2013. Although the company has a large capex programme over the medium term, with relatively short lead time to delivery for most assets, Fitch expects incremental earnings increases from its capital expenditure to allow the company to maintain its credit metrics around current levels. These financial metrics and its business risk profile are appropriate for a 'BBB-' stand-alone rating.
Support from CNOOC: Tangible support to COSL from CNOOC includes the prioritisation of COSL in the domestic business, and financial assistance via the provision of a CNY2bn credit facility in 2009. COSL also manages the operation of deep-water rig HYSY 981, constructed by CNOOC, under a management contract. Fitch feels that developing deep-water capabilities domestically is strategically important for both CNOOC and China, thus, CNOOC will continue to support COSL.
Limited Deep-Water Capabilities: Fitch believes that COSL's biggest challenge is to develop its deep-water capabilities to service CNOOC's future requirements, and CNOOC is increasingly looking to deep waters for reserve replenishment and growth. COSL's history has been more as a provider of oilfield services to CNOOC's shallow-water operations in China.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- weakening of the credit profile of CNOOC;
- evidence of weakening of operating and strategic linkages between COSL and CNOOC, including COSL ceasing to be majority-owned by CNOOC
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- evidence of stronger of linkages between COSL and CNOOC
- strengthening of credit profile of CNOOC, provided the linkages remain intact