RPT-Fitch Rates CNPC's US Dollar Bonds Final 'A+'
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May 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned CNPC General Capital Limited's (CNPCGC) USD750m guaranteed senior floating rate notes due 2017 and USD750m 2.75% guaranteed senior notes due 2019 final ratings of 'A+'.
The ratings reflect the irrevocable and unconditional guarantee by CNPC Finance (HK) Limited (CPFHK; A+/Stable), a wholly owned subsidiary of China Petroleum Finance Limited (CPF). CPF is 51%-owned by China National Petroleum Corporation (CNPC; A+/Stable) and 49%-owned by PetroChina Limited (PetroChina; A+/Stable), which is itself 86.51%-owned by CNPC.
The notes are rated at the same level as CPFHK's senior unsecured rating as they represent unconditional, unsecured and unsubordinated obligations of the company.
The final rating follows a review of final documentation materially conforming to the draft documentation previously reviewed. The final ratings are same as the expected ratings assigned on 6 May 2014.
KEY RATING DRIVERS
Operations Integral with Parent: CPF and CPFHK together function as the sole treasury centre for the CNPC group, centralising settlements, debt financing and cash management. CNPC appoints all of CPF's board members and senior management members. CPF appoints all of CPFHK's board members; CPF, together with CPFHK's board members, appoints all of CPFHK's senior management members. CPF's consolidated assets are also material in the context of CNPC's overall balance sheet.
Support by Parent: Note holders of CPFHK benefit from keepwell deeds from CNPC and CPF. These keepwell deeds, while not guarantees, benefit note holders because they and the articles of association of CPF and CPFHK ensure that the latter has sufficient resources to meet its financial obligations. CPFHK's and CPF's credit profiles are equalised with that of CNPC due to Fitch's assessment of strong legal, operational and strategic ties between the entities under the agency's Parent Subsidiary Linkage methodology. CNPC's standalone credit profile is at the weak end of the 'AA' category; but its ratings are equalised with those of its 100% parent, the Chinese government (A+/Stable).
Large Integrated Player: CNPC's scale, in terms of production and proven reserves - 1,793 million barrels of oil equivalent (boe) and 23,516 million boe, respectively, in 2013 - is comparable to other energy companies in the 'AA' category. Its integrated business profile is strong with own crude production accounting for nearly 80% of its processing requirements in 2013. This, together with its downstream activities, significantly reduces cyclical business volatility. In addition, the company has large-scale petroleum marketing, petrochemical and gas mid-stream operations. CNPC's ability to generate cash is also strong: its fund flows from operations (FFO) were approximately CNY323bn in 2013.
Strategic Importance to the State: CNPC is an integral part of the country's energy supply chain. The company is China's largest oil and gas producer, accounting for approximately 60% of China's total crude oil and natural gas production. The company also accounts for approximately 60% of China's total proved crude oil and natural gas reserves. CNPC's operating activity is subject to extensive regulations and controls by the Chinese government, including those on refinery gate prices for fuels and natural gas, which have led to losses or weak profitability in these operations.
CNPC is also responsible for securing adequate energy resources for the country. Related investments to maintain strong reserves replacement and growth, including M&A, place a significant burden on the company's net cash flow generation. In the last three years, reserves replacement at CNPC has been over 100%. However, the state has continued to provide support to CNPC, including sizeable annual capital injections.
Reform in Progress: The central government's intention to further allow private-sector funding in oil and gas related projects and more value focused investments may lead to positive free cash flow after 2015. Although CNPC's management has only begun drafting the blueprint for participation by strategic investors in different projects and segments of CNPC's businesses, management has already decided to focus its capex on domestic oil and gas exploration and improving refinery capacity and capabilities. Fitch also expects CNPC's investments in pipelines to reduce relative to the past three years. CNPC's main subsidiary, PetroChina, has said it expects its capex in 2014 to be 7% lower than in 2013. Similarly, we expect overall consolidated capex of CNPC to fall to CNY300bn-350bn after 2014 from previous levels (about CNY495bn in 2013).
At the same time, we expect CNPC to further benefit from energy price reforms in China. PetroChina's natural gas and pipeline business posted a CNY28.9bn operating profit in 2013, compared with a loss of CNY2.1bn in 2012. Further gas price reforms should improve the profitability of this business. However, we expect slightly weaker margins in upstream operations due to weaker realized prices on oil. The company is likely to see somewhat improved profitability in its refining operations; however margin pressure is expected for petrochemical products arising from weaker spreads stemming from regional overcapacity.
Overall, Fitch expects CNPC to generate negative FCF in 2014. We also expect CNPC to continue to spend on overseas M&A adding to its external capital requirements. Notwithstanding these, Fitch expects CNPC to maintain its financial leverage, as measured by FFO adjusted net leverage, at below 2.0x (2013:1.5x).
Any change to China's Foreign-Currency Issuer Default Rating will lead to a corresponding change to the IDRs of CNPC. Simultaneously, if the rating linkages among CNPC and CPFHK remain intact, CPFHK's ratings will change accordingly.
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