April 5, 2012 / 10:24 AM / 5 years ago

TEXT-Fitch afrms China's CNPC, CNPC Finance (HK) & PetroChina

Fitch has taken a consolidated view of CNPC's and PetroChina's financial and operating profiles, given CNPC's 86.51% ownership of PetroChina and that the latter accounts for 63.4% of total assets (including around 90% of total proven oil & gas reserves) of the CNPC group. CPFHK is a captive finance subsidiary of CNPC. Under Fitch's parent and subsidiary rating methodology, the agency assesses that overall legal, operational and strategic ties between CPFHK and CNPC are strong enough to warrant equalising the subsidiary's rating with that of the parent.

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. CPFHK is wholly owned by CPF, which in turn is 51% owned by CNPC and 49% by PetroChina. CNPC appoints all CPF's and CPFHK's senior management members and CPF's board exclusively comprises senior management of CNPC and PetroChina. CPF's consolidated budget and business plans are approved by CNPC.

For the benefit of note holders, CNPC and CPF have executed keepwell agreements with CPFHK. These agreements, while not guarantees, are considered to be beneficial to note holders, as they ensure that CPF and CPFHK have sufficient resources to meet their financial obligations. However, in Fitch's view, equalising CPFHK's rating with CNPC's is not primarily dependent on these agreements, but based on the overall assessment of legal, operational and strategic ties.

CNPC is one of the world's largest integrated oil and gas companies with 23.2bn barrels of oil equivalent (boe) proved oil and gas reserves and 1.6bn boe production in 2011. Last year's operating revenues were CNY2.38trn (approximately USD378bn) and EBIT CNY196bn (approximately USD31bn), while gross debt/EBITDA was 1.4x and net debt/EBITDA was 0.6x.

CNPC and PetroChina suffered heavy losses at its refining operations in 2011 due to high oil prices and state-controlled refinery gate prices of petroleum products. PetroChina refining and chemicals operations lost CNY61.9bn in FY11 compared with a CNY7.8bn profit in FY10. However, CNPC and PetroChina continue to generate strong cash flows from operations (CNPC: CNY308bn, PetroChina: CNY290bn in FY11) due to profitable upstream and retail operations.

CNPC has been less aggressive in acquisitions than its peer China Petroleum & Chemical Corporation Limited (Sinopec; 'A'/stable). Fitch does not expect a sharp increase in overseas acquisitions for CNPC, and any large acquisitions are likely to be of conventional oil and gas reserves. Its capex has trailed behind earlier estimates, although the company will continue to incur heavy capex over the next three to four years. A recent increase in fuel prices in China will slow losses at refining operations, although Fitch expects substantial refining losses to continue in the current financial year. These factors are likely to result in CNPC continuing to generate negative free cash flows over the medium-term.

A full list of rating actions:

CNPC:

LTFC IDR affirmed at 'A+'; Outlook Stable

FC senior unsecured rating assigned at 'A+'

LTLC IDR affirmed at 'AA-'; Outlook Negative

LC senior unsecured rating affirmed at 'AA-'

CPFHK:

LTFC IDR affirmed at 'A+'; Outlook Stable

FC senior unsecured rating assigned at 'A+'

LTLC IDR affirmed at 'AA-'; Outlook Negative

LC senior unsecured rating affirmed at 'AA-'

CPFHK's guaranteed SPV instruments

CNPC (HK) Overseas Capital Ltd affirmed at 'A+'

CNPC Golden Autumn Ltd foreign currency dim sum issuance affirmed at 'AA-'

Petrochina's ratings:

LTFC IDR affirmed at 'A+'; Outlook Stable

FC senior unsecured rating affirmed at 'A+'

LTLC IDR affirmed at 'AA-'; Outlook Negative

LC senior unsecured rating affirmed at 'AA-'

Short-Term FC IDR affirmed at 'F1'

Short-Term LC IDR affirmed at 'F1+'

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