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16 Oct 2003
MOODY'S UPGRADES CNOOC'S RATINGS TO A2 FROM Baa1; OUTLOOK STABLE
Approximately US$1.0bn of Debt Securities Affected
Sydney, October 16, 2003 -- Moody's Investors Service today upgraded to A2 from Baa1 the issuer rating
of CNOOC Ltd and the foreign currency long-term rating of its guaranteed
subsidiaries. Moody's also upgraded to A2 from Baa1 the issuer
rating of CNOOC Ltd's parent, China National Offshore Oil Corp (CNOOC).
The outlook on the ratings is stable.
Today's rating actions conclude the review for possible upgrade,
which commenced on September 23, 2002, and which was concurrent
with the placing on review for upgrade of the foreign currency ceiling
of the People's Republic of China (PRC).
The rating upgrades for CNOOC Ltd and CNOOC reflect today's upgrade
of the PRC sovereign foreign currency ceiling to A2 from A3. In
conjunction with the latter, Moody's has revised the ceiling
for Chinese corporate ratings, which may now be aligned to the sovereign's
foreign currency ceiling. Previously, the highest rating
that a Chinese corporate could achieve was one notch below the sovereign
At the same time, the CNOOC Ltd upgrade reflects the company's
fundamental credit quality, including its consistent track record
of maintaining a strong financial profile, and which we expect will
continue over the next 3-5 years.
The upgrade further recognizes management's continued commitment to a
conservative financial strategy and our expectation of ongoing stability
in government policy towards the oil and gas sector. The parent's
rating upgrade recognizes similar trends, along with its strong
balance sheet fundamentals and financial flexibility, and the inherent
strength of CNOOC Ltd, which generates more than 80% of CNOOC's
group cash flow.
CNOOC Ltd has a strong financial profile, well positioning it to
withstand the inevitable volatility in oil prices. Moody's
expects the company -- under our base-case scenario for crude
oil and natural gas prices -- to continue generating a Retained-Cash-Flow-to-Debt
ratio which is above 60%-70% for the next 3-5
years. In addition, the company is expected to maintain high
asset protection measures, including a Debt-to-Proved
Developed Reserves ratio of less than US$1.00 per BOE.
These measures, plus CNOOC Ltd's competitive operating cost
structure, strongly position the company relative to other highly
rated E&P companies.
Moody's believes that CNOOC group and CNOOC Ltd's ratings benefit
from the supportive regulatory regime prevailing in the offshore oil and
gas sector as well as the stability of policy towards the CNOOC group,
which is ultimately controlled by China's State Council.
Reflecting this, CNOOC Ltd enjoys a profitable production-sharing
contract regime and an exclusive right to participate in exploration and
production in offshore China in conjunction with foreign partners.
In addition, a significant portion of the income generated by CNOOC
represents the government's share of oil revenues related to production
from fields developed under production-sharing contracts.
Over the past 21 years, the government has permitted CNOOC to retain
this revenue stream in consideration for capital injection. Moody's
expects this arrangement -- plus the other supportive policies --
to remain in place for the foreseeable future based on our understanding
of government views.
CNOOC's strategy over the next 3-5 years will focus on maintaining
an active production program for oil and gas, through CNOOC Ltd,
combined with the development of downstream petrochemical and LNG projects
as well as natural gas pipelines. These projects include a significant
petrochemical plant at Nanhai and 2 LNG receiving terminals in the provinces
of Guangdong and Fujian. These investments will require significant
capital expenditure over the next few years.
Moody's notes that CNOOC Ltd's large exploration and development
CAPEX may result in negative free cash flow over the next 3 years,
based on Moody's assumptions for crude oil and natural gas prices.
However, CNOOC Ltd's substantial liquid assets -- approximately
US$2.6 billion as at June 30, 2003 -- and its
financial flexibility mitigate this risk.
Accordingly, Moody's does not expect CNOOC group's large capital
expenditure to materially compromise its credit profile, or that
of CNOOC Ltd. We include off-balance sheet obligations and
contingent liabilities in our assessment of the CNOOC group's financial
leverage. Our conclusion is that these items do not materially
affect the group's financial leverage.
CNOOC is a holding company and, as such, its income stream
depends on dividends from CNOOC Ltd and other key subsidiaries,
particularly those involved in oil services and downstream activities.
CNOOC Ltd is also a holding company and its income represents dividends
received from its E&P subsidiaries, which own the operating
Although a holding company structure typically gives rise to structural
subordination, Moody's believes that China has yet to develop a
rigorous legal framework that clearly differentiates between the rights
of creditors of a holding company and those of operating companies.
Consequently, we believe that creditors of CNOOC's and CNOOC Ltd's
operating subsidiaries do not have any meaningful preferential position
relative to creditors of CNOOC and CNOOC Ltd. Moody's expects this
approach towards structural subordination in China to evolve over time,
as the country's legal system becomes more effective.
Moody's notes that CNOOC Ltd's growth may include the potential for further
overseas reserve acquisitions, which would be consistent with the
Chinese government's desire for higher supply ownership to support the
substantial growth in domestic petroleum demand. Such acquisitions
introduce an element of event risk, particularly as some may be
in politically less stable countries. That said, Moody's
believes the company's considerable financial flexibility and management's
commitment to the maintenance of a conservative financial profile mitigate
The stable outlook on the rating reflects Moody's expectation of
CNOOC's continued conservatism towards the management of its balance
sheet and liquidity resources, as well as ongoing stability in China's
policy regime for the oil and gas sector. The A2 ratings and outlook
reflect the fundamental credit quality of CNOOC and CNOOC Ltd, and
are therefore not constrained by the sovereign ceiling, Moody's
CNOOC Ltd, headquartered in Hong Kong, is an oil and gas exploration
and production company with operations concentrated in offshore China.
It is owned 70.6% by China National Offshore Oil Corp (CNOOC).
CNOOC, headquartered in Beijing, is a state-owned enterprise
owned 100% by the State Council of the PRC. The company
has substantial interests in exploration and production, oil services
and chemical companies, in addition to several downstream projects.
Moody's Investors Service Pty Ltd
612 9270 8100
VP - Senior Credit Officer
Moody's Investors Service Pty Ltd
612 9270 8100
No Related Data.
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