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Rating Action:

Moody's affirms CNPC's Aa3 ratings; lowers BCA

 The document has been translated in other languages

16 Dec 2015

Hong Kong, December 16, 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 note (EMTN) program and Aa3 rating of three tranches drawdown under 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. and CNPC General Capital Limited. 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 on all ratings is stable.

At the same time, Moody's has lowered CNPC's baseline credit assessment (BCA) to a1 from aa3 and incorporated one notch uplift of government support into its ratings.

RATINGS RATIONALE

The rating actions follows the sharp reduction in Moody's oil price assumptions in light of continuing oversupply in the global oil markets.

Moody's now assumes the Brent crude, the international benchmark, to average $43 per barrel and US$ 48 per barrel in 2016 and 2017 respectively. This marks a $10 per barrel and $12 per barrel reduction from its previous assumptions for 2016 and 2017 respectively.

"The affirmation of CNPC Group's Aa3 rating, despite lowered its BCA, reflects the very high likelihood of support from the Chinese government (Aa3 stable) in case of need," says Chenyi Lu, a Moody's Vice President and Senior Analyst, and the International Lead Analyst for CNPC.

This support assumption factors in CNPC Group's very high strategic importance to China as the largest national oil company in terms of the size of its oil & gas reserve and production volumes.

"The change in CNPC's BCA reflects its weakened credit profile due to the sharp drop in the crude oil and natural gas prices. We expect that its credit metrics will continue to deteriorate over the next two years, under our recently revised price assumption for crude oil and natural gas," says Kai Hu, a Moody's Senior Vice President, and the Local Market Analyst for CNPC.

The material decline in crude oil prices has significantly lowered CNPC's profits and cashflow. CNPC's operating profit and EBITDA declined by 40% and 27% in 1H 2015, from the same period last year.

The Chinese government's (Aa3 stable) recent cut in natural gas tariffs for non-residential users will further pressure CNPC's credit metrics, as the cut will lower the profits from its domestic onshore gas production and gas import businesses.

Moody's expects the crude oil price will stay at its current low level for a prolonged period. Under our recently revised price assumption for crude oil and natural gas, CNPC's retained cashflow (RCF)/net debt will likely weaken to 52% by end-2016 from 116% in 2014. Such a level would be weak for its previous BCA of aa3.

CNPC's lowered BCA of a1 is strongly supported by its large reserve base and production volume, dominant market position in China, balanced upstream and downstream operations and strong financial cushion.

CNPC Group has also taken proactive actions to reduce its capex, and benefits from the government's mixed ownership reforms. These strengths should help mitigate the negative impact on CNPC's financial profile from the industry downturn.

On 25 November 2015, PetroChina Company Limited (unrated) -- the key listed subsidiary of CNPC -- announced its proposal to sell half of its stakes in the pipeline assets (excluding pipeline assets under construction and cash) owned by Central Asia Pipeline Corporation (unrated), a subsidiary of CNPC, to Mindsoon Holdings Corporation Limited (unrated), which is controlled by China Reform Holdings Corporation Limited (unrated).

CNPC estimates that the proceeds from the proposed sale at RMB15-15.5 billion.

CNPC has a strong liquidity cushion. Its approximate RMB266 billion of cash and RMB178 billion of financial investments at end-June 2015 covered 1.6 times its projected capital spending and 4.3 times its maturing short-term debt.

The stable outlook on CNPC's rating reflects Moody's expectation for the company's continued prudent financial management and 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 beyond Moody's expectation.

Specific credit metrics that Moody's would consider for lowering CNPC's BCA include RCF/net debt below 40%-45% 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 methodology 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 is wholly owned by the Chinese government. Its oil & gas reserves of around 23.7 billion barrels of oil equivalent (boe) and production of 1.88 billion boe in 2014 position it among the top-five integrated oil & gas companies in the world. It had revenue of RMB2,730 billion for the fiscal year 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; lowers BCA
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