Fitch Affirms CNPC, CNPC Finance (HK) and PetroChina at 'A '/Stable
Under Fitch's parent and subsidiary rating methodology, CNPC's ratings are equalised with those of its 100% ultimate owner, the People's Republic of China (A+/Stable). Similarly, the ratings of PetroChina and CPFHK are equalised with the ratings of their parent, CNPC, based on their strong overall legal, operational and strategic ties. Although lower oil prices and the resultant lower cash generation have weakened CNPC's financial profile, its operating and forecast credit metrics are still appropriate for its 'AA-' standalone, unconstrained credit profile.
KEY RATING DRIVERS
Large Integrated Company: CNPC's scale, with production of 1,889 million barrels of oil equivalent (boe) and proven reserves of 23,661 million boe in 2014, is comparable to other energy companies in the 'AA' category. Its integrated business profile is strong with its own crude output accounting for nearly 80% of its processing requirements in 2014. This and downstream activities significantly reduce 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 about CNY339bn in 2014, although its operating cash generation has significantly weakened with lower oil prices in 2015.
Strategic Importance to 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 about 60% of China's total crude oil and natural gas production. The company also accounts for over 60% of total proved crude oil and proved natural gas reserves in China. CNPC's operating activities are 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 in the past.
CNPC is also responsible for securing adequate energy resources for the country. Related investments to maintain strong reserve replacement and growth, including M&A, also place a significant burden on the company's net cash flow generation. CNPC had negative free cash flows in the last three years, but the state has continued to support CNPC, including via favourable policies like increasing the threshold for imposition of the special-oil-gain levy during the low oil price environment, and sizeable annual capital injections through tax rebates and other forms of capital support.
Improved Gas Sales, Refining Margin: CNPC reported higher profitability in its mid-stream gas operations in the first nine months of 2015. While we expect the recently announced price cuts for non-residential city gate gas to narrow profit margins of this segment, profitability will remain higher than in pre-2015 because of the lower cost of imported gas. Refining and chemical margin also increased due to higher demand for high-end products. However, Fitch expects softer refining margins in 2H15 and beyond as regional refining margins adjust from 1H15 levels.
Production to Slow in Near-term: CNPC's production has been growing at around 5% on average in past five years; however, we expect lower production growth with reduced capex under a low oil price environment. Management also has changed its strategy from scale expansion to profit enhancement, as a result, some high-cost exploration and development might be suspended while oil prices remain low.
Slowdown in Investment: CNPC's capex has already dropped from a peak in 2013 with fewer M&A activities. Its 2014 capex fell 24%. Its 2015 capex budget has been tightened. This is evident in Petrochina cutting its capex budget from CNY266bn to CNY255bn during an interim review. PetroChina's new capex budget is 13% lower than in 2014. CNPC's actual capex in 9M15 also declined by 20% to CNY179bn. The fall in global oil prices will hurt CNPC given its large upstream operations, but this will be partly offset by a lower crude oil special-gain levy (from CNY64.8bn in 2014 to zero in 2015), better refining and gas sales margins, and lower capex.
Weaker Credit Metrics: We expect CNPC to post negative free cash flows in the medium term despite capex cuts, which together with weaker-than-expected operating cash generation will keep its financial leverage higher than pre-2015. Financial leverage, as measured by adjusted debt net of cash to fund flows from operations, is likely to remain at around 2.0x (2014: 1.6x) in the medium term.
State Linkage Intact Despite Reforms: CNPC divested part of its stakes in two pipe lines in 2013 in line with the government's reforms of the gas market. . CNPC also carried out reforms to enhance subsidiary autonomy and introduced plans for mixed-ownership reform along the whole business line.
Fitch believes that CNPC is likely to retain control over most key strategic assets that the state may choose to open to private-sector participation. We believe the goal for reform of state-owned enterprises is to diversify funding sources, enhance corporate governance and operational efficiency, while ensuring government control of key energy assets. Fitch expects CNPC's importance in national energy security and price control to remain unchanged and linkage with the state remain strong, even after disposal of part of its stakes in certain assets, while the cash proceeds from those disposals could help to alleviate external cash funding needs, and improve its financial metrics.
Consolidated Approach for PetroChina: Fitch has taken a consolidated view of the financial and operating profiles of CNPC and PetroChina, given CNPC's 86.51% ownership of PetroChina and PetroChina's share of around 90% of the CNPC group's total proven oil and gas reserves.
Consolidated Approach for CPFHK: China Petroleum Finance Limited (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, and CPF appoints all of CPFHK's board members directly. CPF and CPFHK's board members appoint all of CPFHK's senior managers. CPF's consolidated budget and business plans are approved by CNPC.
For the benefit of note holders, CNPC and CPF have executed keepwell agreements with CPFHK. These agreements, while not guarantees, benefit note holders because they ensure that CPF and CPFHK have sufficient resources to meet their financial obligations. However, in Fitch's view, equalising CPFHK's rating with CNPC's is not primarily dependent on these agreements, but is based on their overall legal, operational and strategic ties.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Fitch oil and gas price rating case assumptions for Brent: USD55/bbl in 2015; USD55/bbl in 2016; USD65/bbl in 2017 and USD70/bbl in 2017
- Broadly flat upstream oil and gas production in 2016-2018
- Flat refining throughput growth in 2015, 2% growth in 2016-17, 1% growth in 2018; gas margins to moderate from 9M15 levels
- 2015 capex at around CNY280bn, and change with oil price thereafter
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A negative rating action on the sovereign
- CNPC's 'AA-' standalone profile may be lowered if its FFO-adjusted net leverage is over 2x and FFO fixed-charge cover is under 10.0x, on a sustained basis
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A positive action on the sovereign, provided the rating linkages between the state and CNPC remain intact or CNPC's standalone credit profile remains at 'AA-'.
Ratings on PetroChina and CPFHK will move in tandem with any change in CNPC's ratings
For the sovereign rating of China, the following sensitivities were outlined by Fitch in its
Rating Action Commentary of 31 March 2015:
The main factors that individually, or collectively, could lead to positive rating action include:
- Progress on structural reform oriented towards sustainable longer-term growth;
- Increasing evidence that the economy is adjusting smoothly;
- Greater clarity on the strategy to address the debt problem in the economy, including at local governments.
The main factors that individually, or collectively, could lead to negative rating action include:
- A sharper growth slowdown than currently anticipated, leading to a rise in unemployment and/or a materialisation of risks to financial stability;
- A rise in estimated general government indebtedness well above Fitch's current estimate;
- A change in policy direction that increased economic imbalances and structural vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment.
FULL LIST OF RATING ACTIONS
CNPC:
- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable
- Foreign-currency senior unsecured rating affirmed at 'A+'
- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable
- Local-currency senior unsecured rating affirmed at 'A+'
CPFHK:
- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable
- Foreign-currency senior unsecured rating affirmed at 'A+'
- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable
- Local-currency senior unsecured rating affirmed at 'A+'
CPFHK's guaranteed SPVs for debt issuance:
- CNPC (HK) Overseas Capital Ltd affirmed at 'A+'
- CNPC General Capital Ltd affirmed at 'A+'
PetroChina:
- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable
- Foreign-currency senior unsecured rating affirmed at 'A+'
- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable
- Local-currency senior unsecured rating affirmed at 'A+';
- Short-Term Foreign-Currency IDR affirmed at 'F1'
- Short-Term Local-Currency IDR affirmed at 'F1'
Комментарии