Hong Kong, May 11, 2020 -- Moody's Investors Service has today revised the outlook on China Oil and
Gas Group Limited (COG) to negative from stable.
At the same time, Moody's has affirmed COG's Ba2 corporate
family rating and senior unsecured ratings.
RATINGS RATIONALE
"The change in outlook to negative reflects COG's weakening credit
profile due to low oil prices in the near term arising from the collapse
in demand due to significant global economic slowdown as a result of the
coronavirus outbreak," says Ralph Ng, a Moody's
Assistant Vice President and Analyst.
The expected low oil prices in the near term will materially reduce the
profitability of COG's upstream oil operations in Canada,
and Moody's expects this oil segment to record an accounting loss
in 2020.
Consequently, the overall credit profile of COG will be adversely
affected by its oil segment and a cash flow contribution from this segment
to the holding company in the near term is unlikely.
COG's overseas operations accounted for 6% of segmental profits
and 15% of total assets in 2019[1].
Moody's has reduced its oil price assumptions because of the sharp
fall in demand for oil-related products worldwide due to the deeper
global economic recession Moody's now expects in 2020 in all major advanced
economies. While significant supply adjustments would help to balance
the market later in 2020, demand recovery may return only gradually.
Oil price assumptions for West Texas Intermediate are $30 per barrel
in 2020 and $40 in 2021.
Based on these revised assumptions, COG's retained cash flow
(RCF) to debt will drop to between 11%-12% in the
next 12-18 months from 13% in 2020, a level below
the downgrade trigger of 12% for Ba2 ratings.
COG's weakening credit profile continues to reflect higher business
risk from its overseas upstream operations, compared with its relatively
stable city-gas operations in China.
"In addition, we expect the economic slowdown in China to
moderate gas sales growth in 2020, resulting in a softening cash
flow for COG's natural gas business in China," adds
Ng.
Moody's expects COG's gas sales growth will drop to 5%
in 2020 from its previous estimate of 8%-10% because
of the economic slowdown in China. Consequently, its softening
cash flow from its domestic city-gas operations will not be able
to offset the weakness in its oil segment. That said, the
city-gas operations have gradually been stabilizing since late
February.
Overall, Moody's estimates the company's RCF/debt at
11% in 2020 and 12% in 2021, with its adjusted funds
from operations (FFO) interest cover staying at 3.7x in 2020 and
3.9x in 2021. These metrics are marginal for a Ba2 credit
profile.
The rating affirmation reflects the company's relatively stable
city-gas distribution operation in China, manageable capital
spending and moderate liquidity profile.
The rapid and widening spread globally of the coronavirus outbreak,
deteriorating Chinese and global economic outlook, falling oil prices,
and asset price declines are creating a severe and extensive credit shock
across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The Chinese gas
sector is affected by the shock given its sensitivity to consumer demand
and sentiment.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Rating upgrade is unlikely, given the negative outlook.
The outlook on the ratings could return to stable if (1) oil prices recover
and stabilize on a sustained basis over the next 12-18 months;
(2) COG's gas sales growth remains consistent with or exceeds Moody's
expectation; and (3) the liquidity profiles of COG and its holding
company remain adequate.
COG's ratings could be downgraded if (1) oil prices continue to
drop and remain significantly below Moody's expectation, resulting
in a material cash loss in COG's oil segment; and (2) gas sales
volumes in COG's domestic operations reduce substantially.
Financial metrics indicative of a downgrade include RCF/debt falling below
12% and FFO interest cover staying below 2.5x on a sustained
basis.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017 and available at https://www.moodys.com/research/Regulated-Electric-and-Gas-Utilities--PBC_1072530.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
China Oil and Gas Group Limited (COG) engages in the piped city gas business,
as well as the transportation and distribution of compressed natural gas
(CNG) and liquefied natural gas (LNG). The company also expanded
its footprint to the oil and gas production business in Canada in July
2014.
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 25.92% stake as
of 31 December 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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REFERENCES/CITATIONS
[1] Company's 2019 Annual Report, 24 April 2020
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
Yian Ning Loh
Associate Managing Director
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
