RPT-Fitch: CNPC Pipeline Sale is Positive, State Linkages Unaffected

Fri May 16, 2014 3:08am EDT

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May 16 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has today said that a proposal by China National Petroleum Corporation's (CNPC; A+/Stable) subsidiary PetroChina (A+/Stable) to eventually sell its interest in some of its pipelines does not affect CNPC's ratings nor its linkages with the state. The proposed transaction is in line with China's target to have greater private-sector participation in the energy industry.

PetroChina, which is 86.5% owned by CNPC, will initially transfer the First and the Second West-East Gas Pipeline to a new entity, PetroChina Eastern Pipelines Co., Ltd., and eventually sell its holdings in the entity through a public tender on an equity exchange.

The transaction is positive for CNPC's standalone credit profile in the near term. The transfer will result in a large cash inflow to CNPC, which, along with the company's intention to reduce capex and invest in higher-yielding assets, is positive for its financial profile. China Enterprise Appraisals Co., Ltd has appraised the net asset value of the pipelines at about CNY39bn (USD6.3bn), which is nearly 10% of PetroChina's gross debt of CNY414.6bn at end-2013, and Fitch expects the transfer proceeds to be higher than the net book value.

In Fitch's view, CNPC's greatest strategic value to the central government lies in its upstream operations and the establishment of the assets for delivery and sourcing of energy, areas in which two other large state-owned oil and gas companies also play important roles. CNPC is China's largest oil and gas producer and it accounts for over 60% of China's total crude oil and natural gas production and reserves. It owns or operates 80% of China's total cross-border and cross-county natural gas pipeline network.

Although the government aims to increase private-sector participation in the economy, it is likely to continue to control the development and operation of and investments in pipelines, which are strategically important to China, a net importer of oil and gas. Fitch believes CNPC will continue to be a major investor and initiator of future pipeline assets, particularly as it strengthens its import linkages, for example with Russia.

Fitch expects CNPC to retain strong influence over the operation of the pipelines involved in the latest transfer and eventual sale. This is because CNPC owns most of the upstream operations connected to the pipelines.

Historically, CNPC has been willing to relinquish ownership - but not control - of major gas pipelines. In 2013, when PetroChina contributed its West Pipeline Assets to a joint venture with Taikang Asset and the Guolian Fund, it retained the right to offer to acquire the stakes from the other shareholders while the other two shareholders could not sell their stakes for the first 10 years of the 20-year term of the joint venture.

The privatization of pipelines in China will accelerate as a more transparent regulatory regime for pricing of oil and gas transmission costs is put into place. Fitch expects the Chinese government to continue reforming state-owned assets to promote higher private-sector participation and better capital efficiency while maintaining control and influence over assets that are of high strategic value.

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