Hong Kong, October 02, 2019 -- Moody's Investors Service has upgraded CITIC Resources Holdings Limited
corporate family rating (CFR) to Ba2 from Ba3.
The outlook on the rating is stable.
RATINGS RATIONALE
"The rating upgrade reflects our expectation that CITIC Resources' improved
credit metrics will be sustained over the next 12-18 months,"
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer,
and also Moody's International Lead Analyst for CITIC Resources.
CITIC Resources' debt leverage -- as measured by adjusted debt/EBITDA
-- fell to 3.8x for the 12 months to 30 June 2019, a
level which is materially lower than the 5.8x recorded at the end
of 2017. Positive free cashflow enabled the company to reduce its
reported debt by around 19% to HKD5.7 billion at the end
of June 2019 from HKD7.0 billion at the end of 2017.
The positive free cash flow was in turn underpinned by the recovery in
oil prices during the period, as well as by reduced operating costs
and the company's prudent management of capital spending and investments.
Moody's expects the company's adjusted debt/EBITDA will remain
around 4.0x-4.5x over the next 12-18 months.
This expectation incorporates Moody's forecast of global medium
Brent oil prices of around $65 per barrel, and the expectation
that the company will gradually ramp up production in the Yuedong oilfield
from 2020. Such levels of debt leverage support the company's
standalone credit profile.
"The rating upgrade also reflects CITIC Resources' good liquidity
position and improved debt profile," says Cindy Yang,
a Moody's Vice President and Senior Analyst, and also Moody's
Local Market Analyst for CITIC Resources.
The company's cash balance of around HKD2 billion at the end of
June 2019 together with expected annual operating cash flow of HKD0.9-1.0
billion are sufficient to cover its short-term debt of HKD1.7
billion, planned maintenance capital spending, and dividend
payouts over the next 12 months.
Moreover, the company has received regular support from its parent,
CITIC Group Corporation (CITIC Group, A3 stable), including
a $500 million shareholder loan due 2022 that accounted for 69%
of the company's reported debt at the end of June 2019. This
stable funding structure makes the company more resilient than its rated
oil and gas peers to potential downturns in the cyclical oil and gas industry.
CITIC Resources' Ba2 CFR reflects the company's standalone credit
profile and a three-notch uplift based on Moody's assessment
of a high likelihood of extraordinary support from its parent CITIC Group
in times of financial distress.
Moody's support assessment considers (1) CITIC Resources' important
role within CITIC Group as the overseas platform for natural resource
acquisitions and development; (2) the high reputational risk for
CITIC Group if CITIC Resources were to default; and (3) the track
record of parental support, as demonstrated by the $500 million
shareholder loan granted to the company in 2017.
CITIC Resources' standalone credit profile also reflects the company's
(1) established production track record at its Karazhanbas oilfield;
(2) moderately diversified portfolio of resources, including oil,
coal and other metals; and (3) improved financial management and
liquidity position.
On the other hand, its standalone credit profile is constrained
by (1) its small scale in the oil exploration and production (E&P)
sectors; (2) the fluctuations in its revenues owing to volatility
in oil, coal and metal prices; and (3) its modest credit metrics.
In terms of environmental, social and governance (ESG) factors,
CITIC Resources' main oil and gas E&P operations are exposed
to elevated carbon transition risk over the long term. However,
such risk is partly mitigated by China's large-scale economy,
with sustained demand for oil and gas.
In addition, the company's sound track record of operating in the
oil and gas E&P sector has kept accidents and environmental hazards
to manageable levels.
CITIC Resources demonstrates reasonable transparency in information disclosure
and has an seven-member board of directors with three independent
non-executive directors, in accordance with the listing requirements
of the Hong Kong Stock Exchange. Moreover, the company is
supervised by its state-owned parent, which sits under the
State Council of China through the Ministry of Finance.
The stable outlook reflects Moody's expectation that CITIC Resources'
will (1) continue to generate positive operating cash flow and maintain
its improved debt leverage through disciplined capital spending;
(2) maintain its good liquidity position; and (3) continue to receive
financial support from its parent, CITIC Group, when needed.
Upward pressure on the rating could emerge if the company (1) successfully
ramps up its production scale, while maintaining production efficiency
and operating costs; and (2) reduces its debt leverage, such
that E&P debt/average daily oil production drops below $23,000
per barrel of oil equivalent (boe) or adjusted debt/EBITDA falls below
3.0-3.5x on a sustained basis.
On the other hand, downward rating pressure could emerge if (1)
Moody's assesses that parental support for the company has weakened;
or (2) its credit profile deteriorates due to large debt-funded
acquisitions or capital spending.
Credit metrics indicative of downward pressure include E&P debt/average
daily production rising above $30,000 per boe or adjusted
debt/EBITDA exceeding 5.5x for a prolonged period.
The principal methodology used in this rating was Independent Exploration
and Production Industry published in May 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
CITIC Resources Holdings Limited is an energy and natural resources investment
holding company, with interests in aluminum smelting; coal;
import and the export of commodities; manganese; and bauxite
mining and alumina refining. It also has interests in the exploration,
development and production of oil. The company serves as the principal
natural resources and energy arm of its parent, CITIC Group.
The local market analyst for this rating is Cindy Yang, +86
(138) 104-48986.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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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
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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,
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
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Please see www.moodys.com for any updates on changes to
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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
VP - Senior Credit Officer
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
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Peter Choy
Senior Vice President
Corporate Finance Group
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
