(The following statement was released by the rating agency)
Nov 15 -
Summary analysis -- China Petroleum & Chemical Corp. -------------- 15-Nov-2012
CREDIT RATING: Country: China
Foreign currency A+/Stable/-- Primary SIC: Petroleum
Mult. CUSIP6: 16940D
Credit Rating History:
Local currency Foreign currency
16-Dec-2010 --/-- A+/--
02-Nov-2009 --/-- A/--
The rating on China Petroleum & Chemical Corp. (Sinopec) reflects the company's strong
stand-alone credit profile, which we assess to be 'a-'. The rating also reflects our opinion
that there is an "extremely high" likelihood that the government of China (AA-/Stable/A-1+,
cnAAA/cnA-1+) will provide sufficient and timely extraordinary support to Sinopec in the event
of financial distress. The company's business risk profile is "strong" and its financial risk
profile is "intermediate".
Sinopec is the core and most valuable operating subsidiary of China Petrochemical Corp.
(Sinopec Group, A+/Stable/--, cnAAA), which is one of the three oil companies in
China that the government fully owns. 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 the following Sinopec characteristics:
-- "Critical" role to the government. Sinopec and its parent play a key role in helping the
government ensure a secured supply of energy to meet growing domestic demand. The oil and gas
industry in China has very limited private ownership. This solidifies Sinopec's critical role.
-- "Very strong" link to the government. The Chinese government indirectly owns 100% of
Sinopec Group through State-owned Assets Supervision and Administration Commission. Sinopec
Group in turns controls about 76.3% of Sinopec. In our view, the government is able to exert a
strong influence on Sinopec's strategy through the appointment of its board members and senior
executives and constant surveillance.
Support for Sinopec's stand-alone credit profile comes from its high degree of vertical
integration, diverse assets and revenue streams, and its very strong competitive position
derived from its dominant market position in the production and sale of refined petroleum
products. The company's relatively low self-sufficiency in upstream supplies, a low return on
its refining business due to government's intervention on price, and uncertainty over the
company's ability to generate positive discretionary cash flow on a sustainable basis due to
very large capital expenditure programs moderate these strengths. The rating also takes into
account the parent's slightly weaker consolidated financial risk profile than that of the
Sinopec's large and highly integrated operations, with its diverse assets and revenue
streams, help to mitigate some of the cyclical risks in the industry. The company is the largest
refiner in Asia and accounts for about half of the total domestic production in China. While
Sinopec's upstream operation is larger than those of most independent exploration and production
(E&P) companies, it is smaller than its international integrated peers'. In addition, Sinopec's
upstream production is significantly below its distillation capacity--its own crude supplies can
meet only about 16% of its refining capacity-and therefore the company cannot optimize the
integration benefits. The company has stepped up its efforts to increase upstream investments,
particularly through the acquisition of overseas assets from its parent. However, we do not
expect these investments to materially change the company's self-sufficiency in crude supply in
the next two years.
As inflation eases, the government has adjusted the refined product prices seven times in
2012 without delays. The magnitude of adjustments was pretty much within the specified range. In
our opinion, such closely adherence to the adjustment mechanism is positive for refiners in
China. It would also be positive for the long-term development of the industry if the
implementation of such policy becomes more predictable. Sinopec incurred losses in its refining
segment in 2011 and the first half of 2012. But it made an operating profit for the segment
during the third quarter of the 2012 following a series of price adjustments.
Despite China's short-term economic weakness in this year, we believe the country's strong
growth will keep energy demand robust. Under this scenario, in our view, Sinopec Group's ratio
of debt to EBITDA could increase to close 3x for 2012 from about 2x in 2011 due mainly to the
weak performance of its refining and petrochemical segments. But we expect the ratio to improve
to slightly more than 2x in 2013 as operating conditions improve.
In our view, Sinopec's liquidity is "strong," as our criteria define that term. While
short-term debt accounts for nearly 31% of its total debts, the amount is manageable for the
company. Our assessment of Sinopec's liquidity profile incorporates the following expectations
-- We expect the company's liquidity sources over the next 12-18 months to exceed its uses
by more than 1.6x.
-- Even if EBITDA declines by 30%, we believe net sources would remain positive.
-- The company has solid relationships with its banks and has a good standing in the credit
In our analysis, we assumed liquidity of about Chinese renminbi (RMB) 249 billion over the
next 12 months, consisting of cash, funds from operations (FFO), and available credit
facilities. We estimate the company will use about RMB153 billion during the same period,
including for our projection of capital spending, debt maturities, working capital needs, and
projected dividend distribution to shareholders.
The stable outlook reflects the stable outlook on the rating of Sinopec's parent. We expect
Sinopec to weather through the current operating conditions and maintain its "intermediate"
financial risk profile despite losses from the chemical and refining segments for the first nine
months of 2012. The outlook also factors in our view of an "extremely high" likelihood of
extraordinary government support in the event of financial distress.
We may upgrade Sinopec if we raise the sovereign credit rating on China. We could also raise
the rating if the stand-alone credit profiles of Sinopec and Sinopec Group improve. This could
happen if: (1) the Chinese government liberalizes its pricing mechanism for refined products,
such that Sinopec earns reasonable returns on its refining business; or (2) the current
regulatory environment prevails, but Sinopec overcomes the challenges and improves its financial
risk profile, such that Sinopec and its parent's ratios of adjusted debt to EBITDA are less than
2x and the ratios of FFO to total adjusted debt are more than 45% on a sustainable basis.
Although unlikely, we may lower the rating on Sinopec if government support to the company
declines because of a change in the government's strategies or priorities. We may also lower the
rating if the company's stand-alone credit profile deteriorates to speculative grade, although
the probability of this happening appears remote.