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Rating Action:

Moody's affirms Aa3 ratings of CNOOC Group and CNOOC Limited despite oil price drop

 The document has been translated in other languages

20 Apr 2015

Hong Kong, April 20, 2015 -- Moody's Investors Service has affirmed the Aa3 issuer ratings of China National Offshore Oil Corporation (CNOOC Group) and CNOOC Limited.

Moody's has also affirmed the following guaranteed bond ratings:

(1) the Aa3 rating of the bonds issued by CNOOC Finance (2003) Limited, CNOOC Finance (2011) Limited, CNOOC Finance (2012) Limited, and CNOOC Finance (2013) Limited. These issuances are guaranteed by CNOOC Limited;

(2) the Aa3 ratings of bonds issued by CNOOC Curtis Funding No.1 Pty Ltd and guaranteed by CNOOC Group; and

(3) the Aa3 ratings of bonds issued by CNOOC Nexen Finance (2014) ULC and guaranteed by CNOOC Limited.

The outlook for all ratings is stable.

RATINGS RATIONALE

"While the material decline in crude oil prices will significantly weaken CNOOC Group and CNOOC Limited's profits and cashflow, both companies' proactive response -- by lowering capex and raising production -- and strong financial cushion help preserve their credit profiles and maintain credit metrics appropriate for their Aa3 ratings," says Chenyi Lu, a Moody's Vice President and Senior Analyst, and the international lead analyst for CNOOC Group and CNOOC Limited.

CNOOC Group's Aa3 rating incorporates its BCA of a2 and Moody's assessment that the Chinese government (Aa3 stable) is likely to provide extraordinary support, if needed. Such high support results in a two-notch rating uplift to CNOOC Group's issuer rating to Aa3 under Moody's joint default analysis approach for government-related issuers.

Despite CNOOC Group's holding company status, Moody's believes the risk of structural subordination is mitigated by: (1) its cash and financial assets at the holding company level of around RMB24.6 billion, which could cover the holding company's reported debt as of end-June 2014; (2) the central government support the company is likely to receive in a financially distressed situation. Moody's believes such support would likely be provided directly to CNOOC Group as the holding company, thereby improving the position of holding company creditors over operating company creditors.

CNOOC Limited's Aa3 rating incorporates its standalone credit strength and a two-notch uplift for expected support from CNOOC Group, given CNOOC Limited's significant contribution to its parent's assets and earnings, as well as its critical role in the country's oil and gas sector.

"CNOOC Limited and CNOOC Group's credit profiles are closely linked, as CNOOC Limited is the key listed subsidiary of CNOOC Group, accounting for 60% and 80% of the group's assets and profits before tax, respectively, in 2013," says Kai Hu, a Moody's Vice President and Senior Credit Officer, and the local market analyst for CNOOC Group and CNOOC Limited.

Moody's expects the current low crude prices will cause CNOOC Limited's operating profits and cashflow from operations to shrink by around 70% and 30% in 2015. This, in turn, will result in CNOOC Group's operating profits and operating cashflow falling by around 50% and 25% in 2015.

Nevertheless, both companies' expected savings on expense, taxes and levies, and their plan to increase production volume by 10%-15%, will partially offset the impact from lower oil prices. In addition, CNOOC Limited plans to reduce capital spending by 26%-35% to RMB70-RMB80 billion in 2015, enabling it to fund most of its capex and dividend payment from operating cashflow.

Furthermore, CNOOC Limited and CNOOC Group have large cash holdings and financial investments that can cover their annual capital expenditure or the bulk of their total debt.

Moody's expects that CNOOC Group's adjusted retained cashflow (RCF)/net debt will be around 50% in 2015, before rebounding to around 55% in 2016-17, under Moody's current crude price assumption. CNOOC Limited's debt/average daily production will also stay around USD16,500-USD17,500/barrels of oil equivalent (boe) in 2015-2017. Such metrics, despite on a weakening trend, continue to support both companies' standalone credit profiles.

The stable outlook on CNOOC Group and CNOOC Limited's ratings reflects Moody's expectation of the companies' prudent financial management and their strong ability to withstand the industry downturn.

An upgrade of the sovereign would trigger an upgrade of CNOOC Group and CNOOC Limited's ratings, given the very high level of support they receive from the government.

Likewise, a downgrade of the sovereign rating would trigger a downgrade of CNOOC Group and CNOOC Limited's ratings.

CNOOC Group's BCA and CNOOC Limited's standalone credit profile will come under downward pressure if (1) the crude oil price experiences a further sharp drop or remains at a low level for a longer period than Moody's expectation; or (2) the companies embark on large debt-funded acquisitions.

Specific credit metric that Moody's would consider for a downgrade of CNOOC Group's BCA include: (1) adjusted debt/capitalization above 35%-40%; and (2) RCF to net debt below 45%-50% for a prolonged period.

Credit metrics that would indicate a lower standalone credit strength for CNOOC Limited include adjusted debt/average daily production in excess of USD17,000-USD18,000/boe on a sustained basis.

The principal methodologies used in rating CNOOC Group were Global Integrated Oil & Gas Industry published in April 2014, and Government-Related Issuers published in October 2014. The principal methodology used in rating CNOOC Limited was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CNOOC Limited, incorporated in Hong Kong, is an oil and gas exploration and production (E&P) company with operations mainly in offshore China. It is 64.44%-owned by China National Offshore Oil Corp.

China National Offshore Oil Corp is an integrated Chinese energy company that is wholly-owned by China's State Council and ultimately, the People's Republic of China. 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.

The Local Market analyst for this rating is Kai Hu, +86 (21) 2057-4012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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
Vice President - Senior Analyst
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's affirms Aa3 ratings of CNOOC Group and CNOOC Limited despite oil price drop
No Related Data.
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