S&P Downgrades CNOOC Ltd. (CEO) to 'A+'; Notes Still-Pressured Oil Prices, Lowered Assumptions

Standard & Poor's Ratings Services lowered its long-term corporate credit rating on China National Offshore Oil Corp. (CNOOC Group), CNOOC Ltd.,(NYSE: CEO) CNOOC Finance Corp. Ltd. to 'A+' from 'AA-'. The outlook is stable. At the same time, we affirmed our 'cnAAA' long-term Greater China regional scale rating on the three companies. We also lowered the issue rating on the senior unsecured notes that CNOOC Group and CNOOC Ltd. guarantee to 'A+' from 'AA-' and affirmed our 'cnAAA' Greater China regional scale rating on the notes. This report refers to the three companies collectively as CNOOC.

"We lowered our stand-alone credit profile on CNOOC Group and CNOOC Ltd. to 'a-' from 'a' primarily because oil prices remain depressed and we recently revised our oil price assumptions by 27% for 2016 and 31% for 2017," said Standard & Poor's credit analyst Lawrence Lu.

CNOOC is taking various measures to preserve its cash flow in the currently depressed price environment, including cutting back capital expenditure and costs, but such measures are not enough to stabilize its cash flow adequacy. More specifically, we now expect a debt-to-EBITDA ratio of 2.3x-2.6x for CNOOC Group. and around 2.3x for CNOOC Ltd. in 2016 and 2017, and for the group to generate marginal free operating cash flows during the next two years.

We continue to believe that CNOOC'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.

We continue to believe that there is an "extremely high" likelihood that the government of the People's Republic of China (AA-/Stable/A-1+; cnAAA/cnA-1+) will provide CNOOC with timely and sufficient extraordinary support if the company were to come under financial distress. In accordance with our criteria for government-related entities we base our rating approach on our view that CNOOC plays a "critical" role for and has a "very strong" link to the government.

The stable outlook on CNOOC for the next 24 months reflects our view that there is an "extremely high" likelihood of extraordinary government support for the group if needed, and that CNOOC will maintain its strong market position as a national oil company. We also anticipate that CNOOC will maintain its current level of credit metrics through aggressive cost reductions and lower capital expenditure to offset the negative impact from lower oil prices. CNOOC Finance Corp. is the captive finance subsidiary of the group, and the rating will move in tandem with that on the group.

We believe the likelihood of a downgrade is remote over the next 24 months, given the "extremely high" likelihood that CNOOC could receive extraordinary support from the Chinese government if needed. This support means that the stand-alone credit profile would have to deteriorate to below 'bb-' to trigger a downgrade.

However, we could lower the rating on CNOOC if government support to the group declines because of a change in government strategies or priorities, which we view as remote given China's high reliance on oil imports for energy security. We may also lower the ratings if we lower the sovereign credit rating on China.

We could also lower the rating on CNOOC Finance Corp. if we reassess the group status of the subsidiary or the group credit profile to be weaker, or if we lower the rating on CNOOC.

We could upgrade CNOOC if the group's debt-to-EBITDA ratio approaches 2x on a sustained basis. This could happen if operating cash flows materially improve through a sustainable rebound in oil prices that leads to a recovery in CNOOC's exploration and production business.

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