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Rating Action:

Moody's changes Kunlun Energy's outlook to stable from negative

 The document has been translated in other languages

29 May 2018

Hong Kong, May 29, 2018 -- Moody's Investors Service has changed to stable from negative the outlook on Kunlun Energy Company Limited's A2 issuer rating and senior unsecured debt rating.

At the same time, Moody's has affirmed all ratings.

RATINGS RATIONALE

"The change in outlook to stable reflects the stabilization of Kunlun's credit profile, driven by its steadying business profile and manageable credit metrics that we expect will remain at levels appropriate for its current rating level over the next 12-18 months," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

"We believe that uncertainty over the transmission tariff of the Shaanjing pipeline has now been removed, while the LNG processing and terminal business has turned profitable from a losing position two years ago," adds Kan.

Moody's also expects Kunlun will reduce its capital spending over the next 1-2 years, which will improve retained cash flow (RCF)/debt to 31% in 2019 from 15.4% in 2017, and debt/EBITDA to 2.0x in 2019 from 2.7x in 2017.

These financial metrics are appropriate for Kunlun's standalone credit strength, but leave limited headroom for any unexpected deterioration in its operating and financial conditions.

Moody's estimates Kunlun's capital spending over 2018-2020 to average approximately RMB9.5-10.0 billion annually, compared to RMB12.5 billion in 2017, due to the completion of the Shaanjing No. 4 Pipeline last year. The company plans to use its capex mostly in the downstream natural gas business.

Kunlun's A2 issuer rating incorporates a two-notch uplift from its standalone credit strength, based on the high level of support expected from its parent, China National Petroleum Corporation (CNPC, A1 stable). Moody's expects CNPC will continue to provide a high level of support to Kunlun Energy in times of distress, given Kunlun 's integral role in the parent's only downstream gas platform as well as the track record of parental support.

The company's standalone credit strength is underpinned by (1) its integrated business model, which includes a material level of cash flow from its regulated midstream and downstream businesses with strong market positions, and (2) strong gas demand growth in the midstream pipeline and downstream city gas operations.

At the same time, its credit profile is constrained by (1) China's evolving regulatory regime in the natural gas sector, (2) its high capital spending in previous years, which has limited its financial headroom, and (3) the volatile upstream and LNG businesses.

The stable outlook reflects Moody's expectations that over the next 12-18 months, Kunlun will (1) maintain a stable standalone credit profile and stable financial metrics, (2) maintain strong gas volume growth in its midstream and downstream piped gas operations, and (3) continue to receive a strong level of support from CNPC.

Kunlun's standalone credit profile could improve if the company achieves higher-than-expected volume growth in its midstream and downstream gas piped gas operations such that RCF/debt rises above 40% over a prolonged period.

Kunlun's standalone credit strength could be lowered in case of (1) a material increase in leverage due to, for instance, heavily debt-funded acquisitions, or (2) adverse changes in China's regulatory environment, including new regulations to lower allowed return on natural gas transmission pipelines, and (3) weakening demand in the company's upstream and LNG operations. The rating could also be lowered if CNPC's ratings are downgraded.

Key metrics that could lead to a rating downgrade include debt/EBITDA rising above 3.0x, and/or retained cash flow/debt falling below 25% over a prolonged period.

The principal methodology used in these ratings 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.

Kunlun Energy Company Limited is the major listed platform of China National Petroleum Corporation's (CNPC, A1 stable) downstream natural gas operations, particularly its city gas and liquefied natural gas (LNG)-related businesses.

The company mainly engages in (1) natural gas transmission via its national Shaan-Jing pipelines; (2) downstream city gas operations; (3) LNG processing and storage; (4) sales of LNG/compressed natural gas (CNG) and gas refilling stations for vehicles; and (5) oil and gas exploration & production (E&P). In 2017, the natural gas sales segment and natural gas pipeline segment accounted for 80% and 12% of its consolidated revenue respectively.

At the end of 2017, CNPC owned 61.76% of Kunlun Energy, mainly through its major listed subsidiary, PetroChina Company Limited. CNPC is the largest oil and gas company in China. It is wholly owned by the Chinese government and supervised by the central State-Owned Assets Supervision and Administration Commission.

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.

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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.

Boris Kan
VP - Senior Credit Officer
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

No Related Data.
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