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Rating Action:

Moody's affirms A1 ratings of CNOOC Group and CNOOC Limited; outlook stable

 The document has been translated in other languages

20 May 2021

Hong Kong, May 20, 2021 -- Moody's Investors Service has affirmed the A1 issuer ratings of China National Offshore Oil Corporation (CNOOC Group) and its subsidiary CNOOC Limited. At the same time, Moody's has upgraded CNOOC Group's Baseline Credit Assessment (BCA) to a2 from a3.

Moody's has also affirmed the following ratings:

(1) The A1 senior unsecured ratings on the bonds issued by CNOOC Finance (2003) Limited; CNOOC Finance (2011) Limited; CNOOC Finance (2012) Limited; CNOOC Finance (2013) Limited; CNOOC Finance (2014) ULC; CNOOC Finance (2015) Australia Pty Ltd; CNOOC Finance (2015) U.S.A. LLC; and CNOOC Petroleum North America ULC. These bonds are guaranteed by CNOOC Limited.

(2) The A1 senior unsecured ratings on the bonds issued by CNOOC Curtis Funding No.1 Pty Ltd and guaranteed by CNOOC Group.

The outlook on the ratings is stable.

"The ratings affirmation reflects our expectation that CNOOC Group and CNOOC Limited will maintain a strong financial profile amid China's solid economic growth and likely higher oil and gas prices over the next 12-18 months. In addition, we expect the group to continue receiving a very high level of government support," says Chenyi Lu, a Moody's Senior Credit Officer.

"The upgrade of CNOOC Group's BCA reflects its improved business profile and track record of prudent financial management," says Lu.

RATINGS RATIONALE

CNOOC Group's A1 issuer rating reflects the company's BCA of a2 and a one-notch uplift based on Moody's assessment of a very high level of dependence on, and extraordinary support from, the group's owner, the Government of China (A1 stable).

Moody's support assessment is based on CNOOC Group's strategic importance to China, because it is one of the three major national oil companies (NOCs) in the country and dominates the oil and gas production activities in China's offshore territories. The support assessment also takes into consideration the government's strong ability to provide such support, as reflected in China's A1 sovereign rating. This level of support will provide an additional buffer to CNOOC Group's A1 rating if its BCA comes under pressure.

CNOOC Group's BCA reflects the diversification benefits from its growing midstream and downstream businesses. Nevertheless, its BCA is constrained by its large exposure to the upstream exploration and production (E&P) business and volatile crude oil prices.

CNOOC Group has managed the challenges arising from the low oil price environment and impact of COVID-19 in 2020. Its 2020 results outperformed Moody's expectation given the group has reduced operating costs and adjusted its capital expenditure (capex) plan, while oil and gas production volume increased around 4.3%. The group's stronger retained cash flow (RCF)/net debt is also due to the liquidation of sizable bank wealth management products that materially cut its net debt position.

Given Moody's expectation of China's economic recovery and higher crude prices over the next 12-18 months, CNOOC Group's performance is likely to improve, strengthening its financial metrics in 2021.

Under Moody's assumptions of $55 per barrel for Brent, CNOOC Group's adjusted RCF/net debt will rise to around 160% over the next 12-18 months, from around 86% in 2020, as net debt significantly falls due to likely free cash flow generation. Such metrics support the group's a2 BCA.

Moody's forecasts CNOOC Group will increase its capex to around RMB127 billion. The bigger capex will enable the group to steadily increase production volumes, and maintain a healthy reserve replacement ratio, which are key for an oil and gas company's long-term growth.

CNOOC Group should be able to fund its capex through its cash on hand and cash from operations. Moody's expects the company to generate positive free cash flow in 2021 and 2022, enabling further deleveraging.

Although CNOOC Group's business profile is tilted toward upstream activities, it has been developing its midstream and downstream businesses over the past five years, particularly in the natural gas, refining and petrochemical business. The increased diversification helps mitigate its high exposure to volatile oil prices and alleviate carbon transition risk.

In 2020, CNOOC Group imported around 29.8 million tons of liquefied natural gas (LNG) and generated 59.9 billion cubic meters of domestic natural gas sales, being one of the largest LNG importers in China. This makes it one of the key natural gas suppliers in China. The higher profits from CNOOC Group's natural gas and power generation businesses in 2020 also partially tempered the profit decline in its E&P business.

CNOOC Limited's A1 rating incorporates its standalone credit strength and a two-notch uplift based on Moody's assessment of a very high likelihood of support from the Government of China through its parent company, CNOOC Group.

Moody's views the credit profiles of CNOOC Group and CNOOC Limited as closely linked, given CNOOC Group's 65.01% ownership in CNOOC Limited, which accounts for the majority of the parent company's EBITDA, assets and debt.

In terms of environmental, social and governance (ESG) considerations, CNOOC Group's integrated oil and gas' exploration and production businesses are exposed to elevated carbon transition risk over the long term. This risk is mitigated by CNOOC Group's dominant market position in China's oil and gas sectors and the increasing natural gas production out of its total oil and gas production volume, given that natural gas has a lower environmental impact than other fossil fuels.

In addition, CNOOC Group and CNOOC Limited have also announced their carbon transition strategy. CNOOC Limited plans to allocate 5% of capex to develop renewable energy during 2021-2025. Leveraging its expertise in offshore projects, CNOOC Limited completed its first offshore wind farm project in 2020.

CNOOC Group's sound history of operating in the oil and gas E&P sector mitigates its exposure to accidents and environmental hazards.

CNOOC Group demonstrates sound governance practices and good information transparency because CNOOC Limited — its key operating entity — is listed on multiple stock exchanges, and CNOOC Group is closely supervised by the Chinese government.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook of the ratings reflects Moody's expectation that CNOOC Group and CNOOC Limited will maintain solid financial profiles and remain strategically important to the Chinese government.

CNOOC Group's rating could be upgraded if the Chinese government's ability to support the company strengthens, as reflected in an upgrade of China's sovereign rating.

CNOOC Group's BCA could be upgraded if it continues to improve its business and financial profiles. Financial indicators of an upgrade of the BCA could include maintaining a net cash position (excluding liquid financial assets) on a sustained basis.

An improvement in the company's BCA would not result in an upgrade of its rating because the company's rating is at par with China's sovereign rating.

CNOOC Group's rating could be downgraded if its strategic importance to China decreases significantly; or the Chinese government's ability to support weakens, as reflected in a downgrade of China's sovereign rating.

CNOOC Group's BCA could be lowered to a3 if it makes large debt-funded acquisitions; or crude oil prices drop sharply beyond Moody's expectation, such that the company's adjusted RCF/net debt (excluding liquid financial assets) falls below 80% for a prolonged period.

However, a moderate weakening in CNOOC Group's BCA is unlikely to pressure its A1 rating because of the very high likelihood of support from the Chinese government.

CNOOC Limited's rating is closely linked to that of CNOOC Group. As such, an upgrade of CNOOC Group's rating will trigger an upgrade of CNOOC Limited's rating. Similarly, a downgrade of CNOOC Group's rating will trigger a downgrade of CNOOC Limited's rating.

The principal methodologies used in rating China National Offshore Oil Corporation and CNOOC Curtis Funding No.1 Pty Ltd were Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. The principal methodology used in rating CNOOC Limited, CNOOC Finance (2003) Limited, CNOOC Finance (2011) Limited, CNOOC Finance (2012) Limited, CNOOC Finance (2013) Limited, CNOOC Finance (2014) ULC, CNOOC Finance (2015) Australia Pty Ltd, CNOOC Finance (2015) U.S.A. LLC and CNOOC Petroleum North America ULC was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China National Offshore Oil Corporation is an integrated Chinese energy company that is 90% owned by the State-owned Assets Supervision and Administration Commission under the State Council of the Government of China and 10% owned by the National Council for Social Security Fund. The company has substantial interests in its listed subsidiaries, which are engaged in E&P and the provision of oil services. It also has interests in other downstream businesses, including refining and petrochemicals.

CNOOC Limited, incorporated in Hong Kong, is an oil and gas exploration and production (E&P) company with operations mainly in offshore China. As of end of December 2020, it was 65.01% owned by China National Offshore Oil Corporation.

The local market analyst for these ratings is Kai Hu, +86 (212) 057-4012.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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