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Hong Kong, November 21, 2022 — Moody’s Investors Service has today revised the outlook on China Oil and Gas Group Limited (COG) to negative from stable.
At the same time, Moody’s has affirmed COG’s Ba2 corporate family rating (CFR) and senior unsecured ratings.
“The negative outlook reflects COG’s weakened credit quality in light of the company’s increased governance risks arising from its external guarantee to Shandong Shengli and the lack of clarity on the recovery prospects of its loans to its associate company Sino Director,” says Ralph Ng, a Moody’s Vice President and Senior Analyst.
RATINGS RATIONALE
COG’s provision of an accumulated external debt guarantee of RMB1.1 billion earlier this year to its recently acquired 22.16%-owned associate, Shandong Shengli Co., Ltd., is credit negative. Moody’s has adjusted the total maximum amount of external debt guarantee provision in COG’s credit metrics.
At the same time, the debt guarantee accounts for over half of Shandong Shengli’s total debt as of the end of 2021. COG’s management control over Shandong Shengli highlights the associate’s importance to COG. As a result, Moody’s has consolidated Shandong Shengli on a pro-rata basis based on COG’s equity interest.
Overall, Moody’s estimates COG’s adjusted retained cash flows (RCF)/debt will be between 12.1% and 12.2% in 2023-24, after making the analytical adjustments for Shandong Shengli.
“The uncertainty around the recovery prospects of COG’s loans to associate company Sino Director implies higher governance risks than we previously expected,” adds Ng.
COG has provided loans of about HKD1.06 billion to the subsidiary of Sino Director to invest and operate certain coal mine assets, which commenced phased operations in 2020 after years of investments. Sino Director is a private company and 25%-owned associate of COG.
The considerable size of this related-party transaction undermines COG’s governance framework. Moody’s considers this transaction, as well as the limited transparency of recovering the loan, as a governance risk because it implies an unclear use of capital by COG and brings into question potential cash leakage without appropriate protection to COG and its creditors.
Furthermore, the risks of running a coal mine amid challenging coal policies in China is higher than the risks involved in COG’s conventional city gas distribution.
Given the governance consideration, Moody’s has recalibrated the financial indicators for COG’s current Ba2 CFR to reflect the higher credit risks than previously expected.
Moody’s expects COG’s refinancing ability to weaken amid the current volatile funding environment. The company will use its internal funds, including its cash at the holding company level and dividends from its subsidiaries in China and Canada, to repay its debt obligations over the next 12 months. Moody’s anticipates the holding company’s liquidity will remain weak, assuming it successfully repays its short-term obligations.
COG’s Ba2 CFR is underpinned by the steady growth in the company’s gas sales volumes, supported by positive industry policies and stable domestic city-gas distribution.
In terms of environmental, social and governance (ESG) factors, Moody’s considers COG’s governance risk to be high, considering its investment in and guarantee provision to Shandong Shengli, as well as its loans to Sino Director.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
COG’s negative outlook reflects the company’s weakened credit profile because of the external guarantee and borrowings to its associates. The negative outlook also assumes stable operations at the company’s domestic gas distribution business and the manageable scale of its upstream operations.
Upward rating pressure is limited over the next 12 months, owning to the negative outlook. However, (1) a substantial reduction of the external guarantee, (2) a solid and concrete recovery of COG’s loans to its associate, (3) sustainable improvement in its financial metrics, and (4) improved liquidity at the holding company level on a sustained basis will alleviate downgrade pressure.
Moody’s could downgrade the rating if concerns over COG’s governance persist. Other factors that could result in a rating downgrade include (1) a material increase in upstream risk, (2) aggressive debt-funded expansion projects or acquisitions, (3) adverse regulatory changes, or (4) additional funding support to its upstream business and its associates. Weak liquidity will also trigger a downgrade.
Financial metrics indicative of a downgrade include RCF/debt falling below 13% and funds from operations (FFO) interest coverage staying below 3.0x on a sustained basis.
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://ratings.moodys.com/api/rmc-documents/68547. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
China Oil and Gas Group Limited (COG) engages in the piped city gas business, as well as the transportation and distribution of compressed natural gas (CNG) and liquefied natural gas (LNG). The company expanded its footprint to oil and gas production in Canada in July 2014.
COG listed on the Hong Kong Stock Exchange in 1993 and began its natural gas distribution business in 2002. Xu Tie-liang was the company’s largest shareholder and chairman, with a 27.62% stake in the company as of 30 June 2022.
REGULATORY DISCLOSURES
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 on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
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Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Ralph Ng
Vice President – Senior Analyst
Project & Infrastructure Finance
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Yian Ning Loh
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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