Rating Action: Moody's affirms A1 ratings of Sinopec Group and Sinopec Corp; outlook stable
Global Credit Research - 27 Aug 2020
Hong Kong, August 27, 2020 -- Moody's Investors Service has affirmed the A1 issuer ratings of China Petrochemical Corporation (Sinopec Group) and China Petroleum and Chemical Corporation (Sinopec Corp).
At the same time, Moody's has affirmed the (P)A1 senior unsecured rating for the medium-term note (MTN) to be issued by Sinopec Century Bright Capital Investment Ltd (SCB) and guaranteed by Sinopec Group.
Moody's has also affirmed the following:
(1) the A1 senior unsecured ratings for bonds issued by Sinopec Group Overseas Development (2012) Ltd; Sinopec Group Overseas Development (2013) Ltd; Sinopec Group Overseas Development (2014) Ltd; Sinopec Group Overseas Development (2015) Ltd; Sinopec Group Overseas Development (2016) Ltd; Sinopec Group Overseas Development (2017) Ltd; Sinopec Group Overseas Development (2018) Ltd; and Sinopec Century Bright Capital Investment Ltd. These bonds are guaranteed by Sinopec Group.
(2) the A1 senior unsecured ratings for the bonds issued by Sinopec Capital (2013) Limited and guaranteed by Sinopec Corp.
(3) the A2 issuer rating of SCB.
The outlook on the ratings is stable.
Finally, Moody's has affirmed the P-1 short-term rating for SCB's CP programs, which are co-issued by SCB and Sinopec Century Bright Cap Inv (America) LLC, and guaranteed by Sinopec Group.
The affirmation of the ratings reflects Moody's view that Sinopec Group's and Sinopec Corp's credit profiles will remain resilient amid slower economic growth in China (A1 stable) and the low oil price environment, supported by both companies' large integrated downstream businesses, which help mitigate the impact of low crude prices, their strong financial profile and the expected very high level of support from the Chinese government.
Sinopec Group's A1 issuer rating reflects its BCA of a3 and a two-notch uplift based on Moody's assumption of a very high level of dependence on and a very high likelihood of support from the Government of China in times of need.
Sinopec Group's a3 BCA is supported by its dominant positions in China's energy and chemical industries, as well as its highly integrated business portfolio. The group is the country's largest refiner in terms of throughput volume and second-largest producer of oil and gas in terms of barrel of oil equivalent (BOE) as of the end of 2019. It also owns a large retail gas distribution network comprising 30,702 retail stations as of the end of 2019.
At the same time, Sinopec Group's BCA is constrained by its exposure to oil price volatility and increased overcapacity in the refining sector.
Moody's assessment of very high government support is based on Sinopec Group's critical role in China's oil and gas sector, and takes into consideration the government's strong ability to provide such support, as reflected in China's A1 sovereign rating. This level of support will provide an additional buffer to Sinopec Group's A1 rating if its BCA comes under pressure.
Moody's assessment of Sinopec Group's very high dependence on the Chinese government is underpinned by the group's 100% government ownership and close links with the central government in terms of senior management appointment, business planning and financial reporting.
Sinopec Corp's A1 rating incorporates its standalone credit strength and a two-notch uplift based on Moody's assessment of a very high likelihood of support from the Government of China through its parent company, Sinopec Group.
Moody's views the credit profiles of Sinopec Group and Sinopec Corp as closely linked, given Sinopec Group's 68.77% ownership in Sinopec Corp, which accounts for the majority of the parent company's revenue, earnings, and assets. .
Moody's expects that the sharp drop in crude oil prices in early 2020 and the weaker demand for refined oil products will lower Sinopec Group's revenue and EBITDA in 2020. Nevertheless, the group's large downstream businesses, which normally perform better than its upstream businesses in a low oil price environment, will provide a buffer against declines in earnings.
Demand for oil and gas in China has recovered from a low level since the gradual resumption of business activities in April 2020. Moody's expects Sinopec Group's revenue and EBITDA will increase by 16% in 2021 from 2020, following a respective 33% and 32% drop in 2020.
Sinopec Group is also exposed to increasing overcapacity in China's refining sector, although its strong market position, downstream integration into chemical and retail businesses and strong financial profile partially mitigate this risk.
Moody's expects that the increase in refining capacity will outpace demand growth in the next 2-3 years, given that a number of large refineries came on stream in the past couple of years and several are under construction. As such, Sinopec Corp's refining margin will likely weaken to around $6.5 per barrel in 2020 and around $6 in 2021 from $7.2 in 2019. Its refining margin is unlikely to decline further than this, due to the government's current pricing guidance on gasoline and diesel products, which keep prices afloat, as well as Sinopec Group's strong market positions.
Sinopec Group's planned spin-off of its pipeline businesses is credit positive, as the large cash consideration from the transaction will reduce its net debt position, while the reduction of its EBITDA is insignificant. In addition, the spin-off will also save Sinopec Group's capital spending on its long-distance pipeline projects.
Moody's expects Sinopec Group's RCF/net debt will decrease to around 35% in 2020 from 48% in 2019, before recovering to around 40% in 2021, under its current oil price assumptions. Such metrics remain appropriate for the group's BCA of a3, although headroom within its current BCA will be much narrowed.
SCB's A2 issuer rating primarily reflects its close linkage with its parent company, Sinopec Group. SCB is strategically important to Sinopec Group because it is the sole entity managing the group's offshore treasury operations and facilitating most of the group's crude oil trade. The one-notch difference between Sinopec Group's and SCB's ratings reflects SCB's modest standalone financial position and weak overall credit profile compared with Sinopec Group's, in the absence of a guarantee on all of its debt obligations. Additionally, legal claims at SCB are left uncertain, given that the keepwell agreement provided by Sinopec Group to SCB is not an explicit guarantee in terms of the nature of judgment and the procedures for enforcement.
In terms of environmental, social and governance (ESG) considerations, Sinopec Group's integrated oil and gas' exploration and production businesses are exposed to elevated carbon transition risk over the long term. This risk is mitigated by Sinopec Group's dominant market position in China's oil and gas sector and the increasing natural gas production out of its total oil and gas production volume.
As China's reliance on imported oil and natural gas rises, maintaining stable domestic production is important for the government. Sinopec Group's increasing natural gas output from its shale gas projects alleviates its carbon transition risk, given that natural gas has a lower environmental impact than other fossil fuels.
Additionally, Sinopec Group's advanced refining and petrochemical technology and facilities, as well as its sound operating track record, mitigate its exposure to risks from accidents and environmental hazards, which are inherently high for the refining and petrochemical industry.
On the governance front, Sinopec Group has a good level of transparent information disclosure, given that (1) its key subsidiary, Sinopec Corp, is listed on multiple stock exchanges; (2) Sinopec Group discloses its annual reports in the domestic bond market; and (3) the company operates under the Chinese central government's close supervision.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on Sinopec Group's rating reflects Moody's expectation that over the next 12-18 months, (1) the group's BCA will remain appropriately positioned at the current level; and (2) it will remain highly important to China, and the Chinese government's ability to support will remain.
Moody's could upgrade Sinopec Group's ratings if the Chinese government's ability to support strengthens, which would be reflected by an upgrade of China's sovereign rating.
Moody's could upgrade Sinopec Group's BCA if (1) the group further strengthens its business profile by expanding its natural gas and value-added petrochemical product businesses; or (2) its financial profile strengthens, reflected by a material reduction in leverage and a more prudent investment plan, such that RCF/net debt stays higher than 45%-50% on a sustained basis.
However, an improvement in its BCA will not trigger an upgrade of Sinopec Group's issuer rating given that its rating is already at par with China's sovereign rating.
Moody's could downgrade Sinopec Group's ratings if the Chinese government's ability to support weakens, which would be reflected by a downgrade of China's sovereign rating.
Moody's could downgrade Sinopec Group's BCA to baa1 if (1) the company embarks on large debt-funded acquisitions; or (2) the drop in crude oil prices is steeper or lasts longer than Moody's currently expects, affecting the group's credit metrics such that RCF/net debt stays below 25%-30% over a prolonged period.
However, such a downgrade of its BCA is unlikely to impact its A1 issuer rating, given the very high likelihood of support from the Chinese government.
Both Sinopec Corp's and SCB's ratings are closely linked to that of Sinopec Group. As such, an upgrade of Sinopec Group's rating will trigger an upgrade of Sinopec Corp's and SCB's ratings. Similarly, a downgrade of Sinopec Group's rating will trigger a downgrade of Sinopec Corp's and SCB's rating.
The principal methodologies used in rating China Petrochemical Corporation, Sinopec Century Bright Capital Investment Ltd, Sinopec Century Bright Cap Inv (America) LLC, Sinopec Group Overseas Development (2012) Ltd, Sinopec Group Overseas Development (2013) Ltd, Sinopec Group Overseas Development (2014) Ltd, Sinopec Group Overseas Development (2015) Ltd, Sinopec Group Overseas Development (2016) Ltd, Sinopec Group Overseas Development (2017) Ltd, and Sinopec Group Overseas Development (2018) Ltd were Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. The principal methodology used in rating China Petroleum and Chemical Corporation and Sinopec Capital (2013) Limited was Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
China Petrochemical Corporation (Sinopec Group) is 100%-owned by the Chinese government. It is China's second-largest oil and gas producer by production volume, and also one of the largest enterprises owned by the State Council's State-owned Assets Supervision and Administration Commission.
China Petroleum and Chemical Corporation (Sinopec Corp) is the major listed subsidiary of Sinopec Group, which has a 68.77% stake in it.
Sinopec Century Bright Capital Investment Limited (SCB) was established in March 1995 in Hong Kong as a wholly-owned subsidiary of Sinopec Group. SCB provides settlement, financing, cash management, monitoring and foreign exchange services for the overseas businesses of Sinopec Group.
The local market analyst for these ratings is Kai Hu, +86 (212) 057-4012 .
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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