Fitch Affirms CNPC, CNPC Finance (HK) and PetroChina at 'A+'/Stable

Kunlun Energy

08/08/2019 11:00

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Shanghai-August 08: Fitch Ratings has affirmed the 
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) on China 
National Petroleum Corporation (CNPC), CNPC Finance (HK) Limited (CPFHK) and 
PetroChina Company Limited (Petrochina) at 'A+'. The Outlooks on the IDRs are 
Stable. A full list of rating actions is at the end of this commentary. 

CNPC is 100%-owned by China's central State-owned Assets Supervision and 
Administration Commission (central SASAC), and its ratings are capped by the 
China sovereign (A+/Stable) as per Fitch's Government-Related Entities (GRE) 
Rating Criteria. 

CNPC's standalone credit profile (SCP) is assessed at 'aa-', which is supported 
by its large scale, integrated business model, and the ability to maintain low 
financial leverage in industry downturns. CPFHK's and Petrochina's ratings are 
equalised with CNPC due to the strong linkage of both entities with CNPC, as per 
Fitch's Parent and Subsidiary Rating Linkage.   

KEY RATING DRIVERS

Large Integrated Company: CNPC is one of the largest of Fitch-rated energy 
companies globally by production, with 5.8 million barrels of oil equivalent per 
day (mmboe/day). It has close operational integration with crude production, 
which supports 85% of its downstream processing requirements in addition to 
substantial marketing and mid-stream operations. Such integration enables CNPC 
to weather an industry downturn better than pure upstream peers, as weaker 
upstream performance can be buffered by better earnings from its downstream 
operations, as seen in 2015-2016.  

Rating Capped by Sovereign: CNPC's IDR will remain equalised with that on China 
should its standalone credit profile deteriorate. Fitch assesses CNPC's status, 
ownership and control as 'Very Strong', with the state having firm control over 
CNPC's board, management, operations and strategy. Its revenue and assets are 
among the top three of central state-owned entities (SOEs), and it is a very 
important functional SOE. We assess its support track record and expectations as 
'Very Strong'. The state has supported its national oil companies including CNPC 
via favourable policies and state subsidies, and its standalone credit profile 
has been robust through the cycle as a result.

Very Strong Impact of Default: The socio-political impact of a default by CNPC 
is assessed at 'Very Strong'. CNPC plays a very important role in energy 
security, being China's largest oil and gas producer - accounting for about 53% 
and 68% of total crude oil and natural gas output, respectively. It is the 
largest distributor of energy products and one of the largest importer of crude 
oil and gas in China. The financial implications of a default are assessed as 
'Very Strong' as CNPC (and subsidiaries) are active bond issuers domestically 
and overseas. Investors regard CNPC's bonds as proxies for government bonds. A 
default would severely hurt the funding access of other Chinese GREs.

Upstream-Led Improvement: CNPC's consolidated EBITDA grew by 16% to CNY443 
billion in 2018, led by stronger upstream production volume and a higher 
realised price. Upstream EBITDA per barrel for CNPC's main operating entity, 
PetroChina, reached USD23.7 (2016: USD18.8) as the higher realised oil price 
(+25%) has offset higher lifting costs (+7%). CNPC's upstream performance would 
be likely to retrace in 2019 under Fitch's lower price deck assumption, but 
still partially buffered by mid-single-digit production growth. 

Refining and Marketing Under Pressure: CNPC's refining and marketing EBITDA 
retraced by 20% in 2018. The refining margin would be likely to continue its 
declining trend on strong new incoming supply from both Chinese national oil 
companies and private refiners over the next few years. Demand for refined 
products, meanwhile, would slow down on weaker consumption and the clean-energy 
push in China. 

Leverage Comparable with 'AA-' Peers: CNPC has produced positive free cash flow 
(FCF) for the last two financial years since the recovery of the oil price from 
its cyclical low. FFO adjusted net leverage improved to 1.3x end-2018 (end-2017: 
1.7x) on debt reduction and stronger earnings. Overall performance in 2019 
should be softer, led by weaker upstream and refinery and marketing earnings. 
Coupled with higher budgeted capex, we expect FFO adjusted net leverage to rise 
to around 1.5x, a level still commensurate with other 'AA-' rated global oil and 
gas peers.  

Sector Reforms, Neutral Rating Impact: Fitch views that ongoing market reforms 
aimed at increasing market efficiency are likely to result in some erosion in 
NOCs' earnings, as competition heats up with more private participants taking 
part in the whole oil and gas-value chain. NOCs' strategic importance to the 
country should remain intact, given their role in ensuring China's energy 
security, promoting clean energy and providing affordable energy products to 
end-users. 

Fitch views the spinoff of CNPC's pipeline assets to pave the way for the 
formation of National Pipeline Co to have a negative impact on CNPC's earnings, 
but it has sufficient headroom to absorb the earnings deterioration. Fitch 
estimates CNPC's FFO adjusted net leverage may rise by around 0.3x in the event 
of the loss of pipeline earnings. This would be before taking into account the 
likelihood of cash proceeds from the disposal and government's efforts in moving 
towards a more market-based pricing mechanism for downstream natural gas sales, 
which would help alleviate some of CNPC's policy burdens. 

PetroChina and CPFHK Equalised with CNPC: Fitch takes a consolidated view of the 
financial and operating profiles of CNPC and PetroChina due to strong 
operational and strategic ties. PetroChina is 81%-owned by CNPC. Petrochina is 
the main operating entity and key listing platform under CNPC, accounting for 
70% of CNPC's production as well as 80% of CNPC's EBITDA. About 47% Petrochina's 
debt was extended by CNPC and the latters' subsidiaries. CNPC also guaranteed 7% 
of Petrochina's total debt end-2018. 

Fitch has equalised the rating of CPFHK with CNPC, premised on strong 
operational, strategic and legal linkages. China Petroleum Finance Limited (CPF) 
and CPFHK together function as the sole treasury centre for the CNPC group, 
centralising settlements, debt financing and cash management. CNPC maintains 
strong control over CPF's and CPFHK's management team and operations. 

DERIVATION SUMMARY

CNPC's assessment of 'Very Strong' under status, ownership and control is 
similar to that for State Grid Corporation of China (SGCC, A+/Stable) which is 
also 100%-state-owned. Compared with Petroliam Nasional Berhad (Petronas, 
A-/Stable), the government of Malaysia exerts significant influence through 
operating and financial policies, hence the 'Strong' assessment under this 
factor, but CNPC and SGCC have exceptionally high state involvement in 
investment decisions and management appointments. Support track record and 
expectations of support is assessed as 'Very Strong' for CNPC and SGCC due to 
substantial, consistent government support in the form of subsidies and equity 
injections, which has been sufficient to keep their financial positions at an 
exceptionally strong level; in comparison, Petronas has not received material 
tangible financial support, though we expect this to be forthcoming in the event 
of stress. 

The socio-political impact of a default is also assessed as 'Strong' for SGCC, 
because SGCC is responsible for settling payments to power generators - and a 
default would disrupt power supply, affecting 88% of the Chinese population. 
However, we think a default by CNPC and Petronas would put the energy security 
of China and Malaysia, respectively, in jeopardy, and such an impact will be 
more profound than a default of SGCC. The financial impact of a default is 
assessed as 'Very Strong' for CNPC, SGCC and Petronas because they are large, 
regular issuers in the international bond market, and are seen as proxy 
borrowers of the state.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Fitch oil and gas price rating case assumptions for Brent: USD65/bbl in 2019, 
USD62.5/bbl in 2020, USD60/bbl in 2021, and USD57.5/bbl over the long term

- Oil and gas production to increase by 2%-3% yoy between 2019 and 2021

- Refining production to increase from 2018's level 

- Refining margin to continue trending downward from 2018's level 

- Petrochina's capex to stay around CNY300 billion for the next two years before 
tapering down

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

-    A positive action on the sovereign provided the likelihood of sovereign 
support remains intact, or CNPC's standalone credit profile remains at 'aa-'.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- A negative rating action on the sovereign 

- CNPC's 'aa-' standalone profile may be lowered if its FFO adjusted net 
leverage is over 2x and FFO fixed-charge cover is under 8.0x, on a sustained 
basis; or significant negative FCF generation

Ratings on PetroChina and CPFHK will move in tandem with any change in CNPC's 
ratings, provided the rating linkages remain intact

For the sovereign rating of China, the following sensitivities were outlined by 
Fitch in the agency's Ratings Action Commentary of 4 December 2018: 

The main factors that could lead to positive action, individually or 
collectively, are:

- An orderly resolution of the economy-wide debt problem and a reduction in 
financial imbalances without a material negative impact on growth.

- A high degree of confidence that the economy's pervasive contingent 
liabilities are unlikely to pose a risk to the sovereign balance sheet, for 
example through tangible evidence that implicit government support for 
state-linked companies will no longer be forthcoming.

 - Widespread adoption of the Chinese yuan as a reserve currency. 

The main factors that could lead to negative rating action, individually or 
collectively, are: 

- Policy settings that lead to a further build-up of financial imbalances and 
vulnerabilities.

- An adverse macro shock that weakens medium-term growth prospects or public 
finances. 

- Sustained capital outflows sufficient to erode China's external balance-sheet 
strengths

LIQUIDITY

Comfortable Liquidity, Strong Flexibility: CNPC is viewed as a proxy borrower of 
the state. It has maintained a high level of unencumbered assets, strong access 
to domestic banks, and with a listed platform among its subsidiaries (including 
Petrochina and CPF(HK)) to raise capital when necessary. CNPC has very 
comfortable liquidity, with cash and cash equivalent amounting to CNY426.56 
billion at end-2018 more than covering its short-term borrowings due CNY235.14 
billion.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

FULL LIST OF RATING ACTIONS

CNPC

- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable

- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable

- Foreign- and local-currency senior unsecured rating affirmed at 'A+' 

CPFHK 

- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable

- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable 

- Foreign- and local-currency senior unsecured rating affirmed at 'A+' 

Debt issued by CPFHK's guaranteed SPVs CNPC (HK) Overseas Capital Ltd and CNPC 
General Capital Limited affirmed at 'A+'

PetroChina

- Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable

- Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable 

- Short-Term Foreign-Currency IDR affirmed at 'F1+' 

- Short-Term Local-Currency IDR affirmed at 'F1+'

- Foreign- and local-currency senior unsecured rating affirmed at 'A+'

Contact: 

Primary Analyst

Michelle Leong 

Director

+852 2263 9611

Secondary Analyst

Penny Chen 

Director 

+86 21 6898 7996

Committee Chairperson

Ying Wang 

Managing Director 

+86 21 6898 7980

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: 
leslie.tan@thefitchgroup.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, 
Email: wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Government-Related Entities Rating Criteria (pub. 25 Oct 2018)

https://www.fitchratings.com/site/re/10047173

Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

https://www.fitchratings.com/site/re/10036366

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10085210

Solicitation Status 

https://www.fitchratings.com/site/pr/10085210#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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