S&P Affirms Ratings on CNOOC Ltd. (CEO); Sees Cost Controls, Prudent Spending Withstanding Low Price Environment

Standard & Poor's Ratings Services said today that it had affirmed its 'AA-' long-term corporate credit rating on CNOOC Ltd. CNOOC Ltd. (NYSE: CEO). The outlook is stable. We also affirmed our 'cnAAA' long-term Greater China regional scale rating on the third-largest oil exploration and production company in China. We also affirmed our 'AA-' issue rating and 'cnAAA' Greater China regional scale rating on the senior unsecured notes that CNOOC Ltd. guarantees.

"We affirmed the ratings because we expect CNOOC Ltd.'s effective cost controls and prudent capital spending to help the company withstand a continued low price environment," said Standard & Poor's credit analyst Jian Cheng. "In our view, the company's cash flow adequacy will remain supportive of the rating for the next 12-24 months, as shown in a ratio of debt-to-EBITDA that will likely stay below 2x."

We continue to see an "extremely high" likelihood that CNOOC Ltd. would receive timely and sufficient extraordinary government support if it comes under financial stress.

We believe that CNOOC Ltd.'s dominant position in offshore China is unlikely to be challenged, supporting our assessment of a "strong" business risk profile. The company's increasing and diversified reserve base, satisfactory reserve life, and good production growth also support our assessment of its strong competitive position.

"Under our current oil price assumptions, lower oil price are likely to erode CNOOC Ltd.'s margins and increase the volatility of its profitability," said Mr. Cheng. "Nevertheless, such volatility is unlikely to have any impact on our overall business risk profile assessment because the company is reducing costs to counter the fall in oil prices."

We believe CNOOC Ltd.'s target to cut capital spending is a prudent response to counter the low oil prices. The company aims to cut capital spending to about Chinese renminbi (RMB) 70 billion-RMB80 billion in 2015, significantly lower than RMB107 billion in 2014. Nevertheless, we expect CNOOC Ltd.'s leverage to increase in 2015 because of weaker operating cash flow generation and partly debt-fund capital spending. The company's large cash position, including time deposits and short wealth management products, provides a good cushion against the increasing leverage. The leverage should still be well within the tolerance range for the rating. As a result of these factors, we expect CNOOC Ltd.'s financial risk profile to remain "modest" over the next two years, and estimate that the debt-to–EBITDA ratio is likely to deteriorate to about 1.6x in 2015-2016 from 0.7x in 2014.

We have revised our liquidity assessment for CNOOC Ltd. to "adequate" from "strong," given the deterioration in the company's generation of funds from operations due to low oil prices. Nevertheless, the company has good relationships with its banks and has a good standing in the credit markets.

The stable outlook on CNOOC Ltd. reflects the outlook on the sovereign credit rating on China (AA-/Stable/A-1+; cnAAA/cnA-1+).

We could lower the rating on CNOOC Ltd. if we downgrade China or if the government reduces its support to the company because of a change in the government's strategies or priorities, a scenario we view as unlikely.

We could also downgrade CNOOC Ltd. if the company's stand-alone credit profile of 'a' deteriorates. This could happen if: (1) oil prices fall below our base-case assumption and stay at the low level for an extended period; or (2) the company becomes more aggressive in terms of debt-funded acquisitions or debt-funded capital expenditure programs, which could increase its leverage. A ratio of debt to EBITDA increasing to more than 2x on a sustainable basis could indicate such weakness.

We may upgrade the company if we raise the sovereign credit rating.

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