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Rating Action:

Moody's assigns Aa3 to CNOOC Limited's proposed USD notes

 The document has been translated in other languages

23 Apr 2014

Hong Kong, April 23, 2014 -- Moody's Investors Service has assigned a Aa3 senior unsecured rating to the proposed USD notes to be issued by CNOOC Nexen Finance (2014) ULC and guaranteed by CNOOC Limited.

At the same time, Moody's has affirmed CNOOC Limited's Aa3 issuer rating, as well as 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.

All these issuances are guaranteed by CNOOC Limited.

The outlook for all ratings is stable.

The proceeds from the proposed notes issuance will be used in part to repay all or part of the outstanding borrowings of CNOOC Limited's wholly-owned subsidiary Nexen Energy ULC under the US$2.0 billion facility agreement Limited. The remaining proceeds, if any, will be used for general corporate purposes.

RATINGS RATIONALE

The Aa3 rating of CNOOC Limited incorporates the company's underlying credit strength and a two-notch uplift for parental support by China National Offshore Oil Corporation (CNOOC Group, Aa3 stable), which is in turn directly owned by the Chinese government (Aa3 stable).

The high level of parental support is based on the premise that CNOOC Limited contributes significantly to its parent's assets and earnings, and plays a critical role in China's oil & gas sector.

"CNOOC Limited's standalone credit strength is supported by its dominant position in the Chinese offshore oil & gas sector, its substantial reserves, its proven exploration and production (E&P) track record, as well as its considerable financial flexibility against the backdrop of growing reinvestment risks," says Chenyi Lu, a Moody's Vice President and international lead analyst for CNOOC Limited.

"As a result of its stable production volume and the relatively high oil price of around US$100/barrel, the company's 2013 results were in line with our expectations. The acquisition of Nexen strengthens CNOOC Limited's position as one of world's largest independent E&P companies and further diversifies its product portfolio," says Lu.

"Nevertheless, CNOOC Limited's finding and development costs and lifting costs are rising, reflecting the high cost base of Nexen and industry-wide cost inflation," says Kai Hu, a Moody's Vice President and local market analyst for CNOOC Limited.

"As of 31 December 2013, CNOOC Limited's retained cash flow (RCF)/adjusted debt was around 59% and adjusted debt/average daily production was around USD21,400/barrels of oil equivalent (boe); such credit metrics are weak for its standalone credit strength and reduce its headroom for further larges acquisitions," adds Hu.

The weakened credit metrics are a result of an increase in gross debt, which was mainly associated with the Nexen acquisition. CNOOC Limited also took advantages of the arbitrage opportunities between onshore and offshore interest rates by raising additional offshore debt and investing in onshore projects. The result has been a large increase in both cash and investments, as well as debt on CNOOC Limited's balance sheet.

On the other hand, we draw comfort that CNOOC Limited exercises adequate risk control over these arbitrage activities. If we exclude the debt associated with arbitrage, the resulting metrics of RCF/adjusted debt of around 83% and adjusted debt/average daily production of around USD15,200/boe would be more in line with its standalone credit strength.

CNOOC Limited's liquidity position remained strong at end-2013, supported by its adequate cash holdings and other short-term investments on its balance sheet, as well as substantial amounts of unused bank credit. Its planned capital spending of around RMB105-120 billion for 2014 will largely be funded by projected cash from operations of about RMB100-110 billion.

The stable outlook reflects an expectation of steady production growth and reserve replacement, as well as the continued high level of support from its parent.

A sovereign upgrade would trigger a rating upgrade of CNOOC Group, which would lead to an upgrade of CNOOC Limited.

We see limited upside potential in CNOOC Limited's standalone credit strength, given the high reinvestment risk, large capex plan and implementation risks associated with its overseas expansion.

A rating downgrade of its parent -- which is not very likely in the near term, given its stable rating outlook -- could also trigger a rating downgrade of CNOOC Limited.

The rating could also be downgraded if there is a material deterioration in the company's business and financial profile , such as, a significant increase in leverage owing to further large acquisitions, or a sharp increase in its reinvestment risk.

Specific credit metrics that would indicate lower standalone credit strength include: adjusted debt/average daily production in excess of USD15,000-17,000/boe and RCF/adjusted debt ratio below 70%-75%.

The principal methodology used in these ratings was the Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CNOOC Limited, incorporated in Hong Kong , is an oil and gas E&P company with operations mainly concentrated 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 (10) 6319-6560.

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.

Lu, Chenyi
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 assigns Aa3 to CNOOC Limited's proposed USD notes
No Related Data.
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