Hong Kong, July 15, 2019 -- Moody's Investors Service has assigned a Ba2 senior unsecured rating
to the proposed USD bond to be issued by China Oil and Gas Group Limited
(COG, Ba2 stable).
The outlook is stable.
COG plans to use the net proceeds mainly to redeem the outstanding USD
bonds.
RATINGS RATIONALE
"COG's Ba2 corporate family rating reflects its steadily growing
gas sales volumes, fairly stable credit metrics, and China's
supportive clean energy policies," says Ralph Ng, a
Moody's Assistant Vice President and Analyst.
"However, these strengths are balanced by the high business risks
associated with COG's overseas upstream operations, a potential
currency mismatch between its offshore debt obligations and onshore cash
flow, and weakened track record of passing through its costs to
end-users," adds Ng.
While COG had since 2015 passed on cost increases to end-users
in a timely manner, prolonged delays in passing on higher prices
for Qinghai city gas projects have somewhat weakened this track record.
"The proposed issuance will not materially change COG's credit profile,
because the net proceeds will be used to refinance existing debt,"
says Ng.
Moody's estimates that COG will incur capital expenditure of HKD1.0-HKD1.2
billion per year in 2019 and 2020, and that adjusted funds from
operations/debt will stay around 15% and retained cash flow (RCF)/debt
around 12%-13% over the same period.
The stable outlook reflects Moody's expectation that the company
will maintain a stable financial profile and keep its upstream operations
at a manageable scale, and that liquidity at both the consolidated
and holding company level will remain adequate.
Near-term upward momentum for the rating is unlikely but it could
emerge over time if COG (1) establishes a proven track record, with
timely cost pass-through for its city gas projects, particularly
in the Qinghai area; and (2) shows an increased diversification in
revenue, such that Qinghai Province contributes less than 30%
of total revenue.
Metrics that Moody's would consider for an upgrade include RCF/debt
above 18% and debt/capitalization below 40%-45%
on a sustained basis.
The rating could be downgraded if COG (1) becomes exposed to a material
increase in upstream risk exposure, (2) carries out aggressive debt-funded
expansion projects or acquisitions, (3) faces adverse regulatory
changes, or (4) needs to provide additional funding support to its
upstream business.
Financial metrics Moody's would consider for a downgrade could include
(1) RCF/debt falling below 12% and debt/capitalization rising above
50% on a sustained basis; and (2) total unencumbered cash
and liquid securities held by the holding company and majority-controlled
subsidiaries falling below RMB700 million.
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
China Oil and Gas Group Limited (COG) is engaged in piped city gas operations,
as well as in the transportation and distribution of compressed natural
gas (CNG) and liquefied natural gas (LNG). The company expanded
its footprint to oil and gas production in Canada in July 2014.
As of 31 December 2018, COG had 71 piped city natural gas concession
rights in 16 provinces and autonomous regions in China, and 55 CNG/LNG/L-CNG
gas stations and natural gas branch pipelines in 10 provinces for midstream
distribution.
COG listed on the Hong Kong Stock Exchange in 1993 and began its natural
gas distribution business in 2002. Xu Tie-liang was the
largest shareholder and chairman with a 24.68% stake as
of 31 December 2018.
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 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.
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 entity is participating and the rated entity or its agent(s)
generally provides 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.
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.
Ralph Ng
Asst Vice President - Analyst
Project & Infrastructure Finance
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
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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
