17 February 2016Actuarial & underwriting

Ratings of Chinese national oil companies on review for downgrade

Moody's Investors Service has placed on review for downgrade the Aa3 ratings of China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec Group), China Petroleum and Chemical Corporation (Sinopec Corp), China National Offshore Oil Corporation (CNOOC Group), and CNOOC.

The ratings review follows Moody's global rating actions on many energy companies, reflecting Moody's effort to recalibrate the ratings in the energy portfolio to align with the fundamental shift in the credit conditions of the global energy sector.

Oil prices have deteriorated substantially and have reached nominal price lows not seen in more than a decade. As part of its ongoing assessment of the energy markets, Moody's has drastically lowered its oil price assumptions in light of the ongoing oversupply in the global oil markets and demand growth that remains tepid.

“We see a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall even further,” said the firm.

“Even under a scenario of a modest recovery from the current oil prices, Chinese national oil companies can expect a deteriorated financial profile with much weaker cash flows.”

Moody’s said lower oil prices will further weaken the cash flows of exploration and production (E&P) companies such as CNOOC, and the upstream portion of integrated oil and gas companies including CNPC and Sinopec Group. It said this will result in a further deterioration in their key financial ratios, including retained cash flow (RCF)/net debt, EBIT/interest expense, and E&P debt/average daily production.

The affirmation of the P-1 ratings reflects Moody's view that the issuer ratings of the Chinese national oil companies and their rated subsidiaries are unlikely to have large rating movement given the expected very high government support.