OREANDA-NEWS. 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 its wholly owned subsidiaries COSL Finance (BVI) Limited and COSL Singapore Capital Limited, both guaranteed by COSL.

The ratings reflect COSL's close linkage and importance to its parent, the wholly state-owned China National Offshore Oil Corporation (CNOOC). The close relationship translates into solid order flow for COSL, buffering the company's weakening cash flow metrics in view of market challenges.

KEY RATING DRIVERS
Linked to CNOOC: COSL's ratings are closely aligned with the credit profile of its parent, CNOOC, in line with Fitch Ratings' parent and subsidiary rating linkage methodology. This is due to the strong strategic and operational linkages between the two companies, and the tangible support COSL has received from CNOOC, which owns 50.52% of COSL.

Importance to CNOOC: COSL has consistently accounted for around 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. Fitch considers the relationship between COSL and CNOOC to be mutually beneficial as CNOOC brings stability to COSL's business profile while COSL's integrated oilfield service model provides significant efficiencies and cost savings to CNOOC. The agency believes this relationship will remain intact and CNOOC will remain the controlling shareholder of COSL.

Stability of Cash Flow: The relationship with CNOOC translates into stability and visibility of earnings for COSL. COSL generates around 60% of its revenue from CNOOC. COSL continues to be given priority by CNOOC in its domestic operations, although the latter plans to reduce its capex due to the subdued oil prices. Fitch expects CNOOC to continue to account for more than 50% of COSL's revenue in the medium term.

Support from CNOOC: Tangible support to COSL from CNOOC includes financial assistance via the provision of various credit facilities. COSL also manages the operation of deep-water rig HYSY 981, constructed by CNOOC, under a management contract. Fitch believes that developing deep-water capabilities domestically is strategically important for both CNOOC and China, and CNOOC will therefore continue to support COSL.

Credit Metrics to Weaken: COSL historically had robust credit metrics and sound liquidity. Its funds from operations (FFO)-adjusted net leverage was 2.6x in 2014 and FFO fixed-charge coverage was 5.5x. These metrics are likely to weaken in the near term due to the current subdued market conditions, with FFO net leverage trending to 3x-3.5x and FFO fixed-charge cover to around 4.5x. Nonetheless, COSL has some flexibility in its capital expenditures, which would allow the company to preserve its liquidity, and will continue to have relatively stable order flow from its group companies. As a result, Fitch believes COSL's standalone credit strength is still commensurate with a 'BBB-' profile.

Limited Deep-Water Capabilities: Fitch considers COSL's biggest challenge to be the development of deep-water capabilities to meet the future needs of CNOOC, which is increasingly looking to deep-water resources 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. COSL has been investing in new deep-water assets to raise its capabilities to support CNOOC's deep-water projects.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- Drilling rig and vessel utilisation rates to decline by 5%-10% in 2015 and gradually recover afterwards;
- Day rates to decline moderately in 2015 and gradually recover afterwards;
- Annual capex in the range of CNY6.5bn-7.5bn in 2015-2017.

RATING SENSITIVITIES
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 CNOOC's credit profile, provided the linkages remain intact.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Weakening of CNOOC's credit profile;
- Evidence of weaker operating and strategic linkages between COSL and CNOOC.

LIQUIDITY
COSL's liquidity was adequate at 30 June 2015, with unrestricted cash balances of CNY6.3bn and undrawn facilities of CNY32bn, compared to its CNY9.1bn of debt maturing within one year.