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Rating Action:

Moody's affirms CNPC's A1 rating; outlook remains stable

 The document has been translated in other languages

26 Aug 2021

Hong Kong, August 26, 2021 -- Moody's Investors Service has affirmed the A1 issuer rating of China National Petroleum Corporation (CNPC).

At the same time, Moody's has also affirmed the following ratings:

(1) The A1 senior unsecured rating on the bonds issued by CNPC Global Capital Limited and guaranteed by CNPC;

(2) A2 issuer rating of CNPC Finance (HK) Limited (CPF HK), the key offshore treasury subsidiary of CNPC, and the P-1 short-term rating for CPF HK's commercial paper;

(3) A2 senior unsecured rating for bonds issued by CNPC General Capital Limited and CNPC (HK) Overseas Capital Ltd. The notes are guaranteed by CPF HK and ultimately supported by CPF HK's immediate parent, China Petroleum Finance Co., Ltd (CPF), and its ultimate parent, CNPC in the form of keepwell agreements.

The outlook on the ratings remains stable.

"The rating affirmation reflects our expectation that, as the largest oil and gas producer in China, CNPC will maintain a strong financial profile over the next 12-18 months, supported by its balanced upstream and downstream businesses and large operating scale. In addition, we expect the group to continue receiving a very high level of government support," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

RATINGS RATIONALE

CNPC's A1 issuer rating incorporates its Baseline Credit Assessment (BCA) of a1, and Moody's assessment of the company's very high level of dependence on, and very high likelihood of support, from the Government of China (A1 stable), in times of need.

The very high support level takes into considerations of CNPC's 1) ultimate 100% ownership by and close linkage with the central government; 2) very high strategic importance to China, as the largest national oil and gas company by oil and gas reserves and production volumes; and 3) high reputational risk to the Chinese government if it defaults.

The very high dependence level reflects the fact that (1) CNPC has a strong institutional linkage with the Chinese government; and (2) CNPC and the government are exposed to common political and economic risk factors.

CNPC's a1 BCA is underpinned by its (1) balanced upstream and downstream business portfolio; (2) very large reserve and production scale; (3) dominant position in China's oil and gas markets; and (4) resilient and strong financial metrics.

CNPC has managed the challenges arising from the low oil price environment and impact of COVID-19 in 2020 and maintained a solid financial profile that supports its BCA. Amid a low oil price environment, the group has cut operating costs and adjusted its capital expenditure (capex) plan, while its oil and gas production volume increased by 2%.

Given Moody's expectation of China's economic recovery and high oil prices in 2021, CNPC's performance is likely to improve, which will lead to better financial metrics in 2021.

Under Moody's Brent oil price assumptions of $66 per barrel in 2021 and $55 per barrel in 2022, CNPC's adjusted retained cash flow (RCF)/net debt will rise to around 100% in 2021 and maintain at around 85% in 2022, from around 65% in 2020. Such a financial profile is strong for its a1 BCA.

Moody's forecasts CNPC will maintain its capex plan at around RMB300 billion over the next 1-2 years and can adjust its capex if oil prices drop materially.

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

In addition, CNPC has also announced its carbon transition strategy. CNPC plans to increase gas output to around 55% in its production mix by 2025 from 43% in 2020.

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

CNPC demonstrates sound governance practices and good information transparency because PetroChina Company Limited — its key operating entity that accounted for 93% of its revenue in 2020— is listed on multiple stock exchanges, and CNPC is closely supervised by the Chinese government. CNPC also discloses its quarterly financials in the domestic bond market.

CPF HK's A2 rating reflects its close linkage with its parent, CPF, and its ultimate parent, CNPC. CPF and CPF HK are strategically important to CNPC, because they manage CNPC's onshore and offshore treasury operations. The keepwell agreements from CPF and CNPC, which cover CPF HK's general debt obligations, reinforce Moody's assumption of a high likelihood of extraordinary parental support for CPF HK.

The rating difference between CNPC and CPF HK also reflects the modest standalone credit profile of CPF HK and its weaker overall credit profile than that of CNPC, in the absence of an explicit guarantee. Moody's views keepwell agreements to be different from guarantees in terms of the nature of the judgment and the procedures for enforcement.

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

The stable outlook reflects Moody's expectations that over the next 12-18 months (1) CNPC's rating can withstand a moderate deterioration in its BCA; and (2) CNPC's importance to the Chinese government and the government's ability to support the company will remain intact, the latter of which is mirrored in the stable outlook on China's sovereign rating.

Moody's could upgrade CNPC's rating if the Chinese government's ability to provide support strengthens, which would be illustrated by an upgrade of the sovereign rating.

On the other hand, Moody's would downgrade CNPC's rating if the Chinese government's ability to provide support weakens, which would be illustrated by a downgrade of the sovereign rating.

Moody's could downgrade CNPC's BCA to a2 if the company embarks on large debt-funded acquisitions or crude oil prices further drop sharply beyond Moody's expectations, such that CNPC's RCF/net debt falls and remains below 50% over a prolonged period.

However, a moderate weakening in the company's BCA is unlikely to lead to a downgrade of its A1 rating, given the very high likelihood of extraordinary support from the Chinese government.

CPF HK's rating is closely linked to that of CNPC. As such, an upgrade of CNPC's rating would trigger an upgrade of CPF HK's rating. Similarly, a downgrade of CNPC's rating would trigger a downgrade of CPF HK's rating.

The methodologies used in these ratings 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. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China National Petroleum Corporation (CNPC) is the largest oil and gas company in China by production volume. It is 90% owned by China's State Council and 10% owned by the National Council for Social Security Fund, and ultimately, the Chinese government. The company's revenue totaled RMB2.1 trillion for the fiscal year ended 31 December 2020.

CNPC Finance (HK) Limited (CPF HK) is a wholly owned offshore subsidiary of China Petroleum Finance Co., Ltd, which is a treasury subsidiary of CNPC. As of the end of 2020, CPF HK had total assets of around $27.7 billion and an equity base of around $3.8 billion.

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_1288435.

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

No Related Data.
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