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Rating Action:

Moody's affirms CNPC's Aa3 ratings 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 Petroleum Corporation (CNPC), as well as:

- The (P)Aa3 rating of the Euro Medium Term Notes (EMTN) program launched by CNPC General Capital Limited and guaranteed by CNPC.

- The A1 rating of the bonds issued by CNPC (HK) Overseas Capital Ltd. The notes are guaranteed by CNPC Finance (HK) Limited (A1 stable) -- which is in turn supported by its ultimate parent, CNPC -- in the form of Keepwell Agreements.

- The Prime-1 rating for the commercial paper program launched by CNPC Finance (HK) Limited.

The outlook for all ratings is stable.

RATINGS RATIONALE

"While the decline in the oil price will significantly weaken CNPC's profits and cashflow, its proactive response -- by lowering capex, promoting mixed ownership reform of state-owned enterprises, good business diversity and strong financial cushion -- will help preserve its financial profile and maintain credit metrics appropriate for its Aa3 ratings," says Chenyi Lu, a Moody's Vice President and Senior Analyst, also the international lead analyst for CNPC.

CNPC's Aa3 rating reflects the company's baseline credit assessment (BCA) of aa3 and the very high extraordinary support the Chinese government (Aa3 stable) is likely to provide, underpinned by the company's strategic importance to China's energy security. As such, the company's Aa3 rating is resilient to a weakening of its BCA under Moody's joint default analysis approach for government-related issuers.

Despite CNPC's holding company status, the risk of structural subordination is mitigated by: (1) its cash and financial assets at the holding company level of around RMB312 billion, which can largely cover its reported debt of around RMB335 billion as of end-June 2014; (2) the support the central government is likely to provide in a financially distressed situation. Such support would likely be provided directly to CNPC as the holding company of the group, thereby improving the position of holding company creditors over operating company creditors.

CNPC's operating profits will shrink by around 40% in 2015 as a result of the lower oil prices, although partially offset by expected savings on expenses, taxes and levies.

In addition, Moody's expects CNPC's natural gas business will generate more profits in 2015, based on the expected increase in production volumes and relatively stable selling prices. CNPC's downstream businesses -- including the refining, petrochemical and retail business -- should generally benefit from the weaker crude oil price.

CNPC's plan to reduce capital spending by at least 10% in 2015 will narrow the gap between its operating cashflow and capital expenditure. The mixed ownership reform should also help CNPC attract more private capital, which will lower its demand for additional debt.

"We expect CNPC's debt/capitalization ratio will remain around 23%, and retained cashflow (RCF)/net debt ratio at around 60% in 2015. Such credit metrics support its BCA at the current level," says Kai Hu, a Moody's Vice President and Senior Credit Officer, also the local market analyst for CNPC.

CNPC has a strong liquidity cushion. It had around RMB256 billion of cash and RMB207 billion of financial investments at end-June 2014, which can cover more than one year of its projected capital spending and dividend payments.

The stable outlook on CNPC's rating reflects Moody's expectation for the company's prudent financial management and its strong ability to withstand the industry downturn.

An upgrade of the sovereign will trigger an upgrade of CNPC's rating, given the very high level of support from the government.

Likewise, a downgrade of the sovereign rating will trigger a downgrade of CNPC's rating.

CNPC's BCA would come under downward pressure if the company embarks on large debt-funded acquisitions or if the crude price declines further and/or remains at a low level for longer than Moody's currently expects.

Specific credit metrics that Moody's would consider for a lowering of CNPC's BCA include RCF to net debt below 50% for a prolonged period.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

China National Petroleum Corporation is the largest oil & gas company in China and wholly owned by the Chinese government. Its oil & gas reserves of around 23.5 billion barrels of oil equivalent (boe) and production of 1.79 billion boe in 2013 also position it among the top-five integrated oil & gas companies in the world. It had revenue of RMB2,784 billion for the 12-month period ended June 2014.

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 CNPC's Aa3 ratings despite oil price drop
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