Moody’s Investors Service says that China Oil and Gas Group Limited’s (COG) profit warning is credit negative, but does not have an immediate impact on its Ba2 corporate family rating and senior unsecured rating, as well as their stable ratings outlook.
On 28 January 2016, COG announced that it would record a decline in consolidated net profit for the year ended 31 December 2015, compared to a year ago, due to the significant drop in the international crude oil price.
“COG’s Ba2 ratings incorporate our expectation of its weakened credit profile due to the weak oil price and prolonged delays in cost pass-through of its Qinghai projects,” says Ivy Poon, a Moody’s Assistant Vice President and Analyst.
On 30 November 2015, Moody’s downgraded COG’s ratings to Ba2 from Ba1, reflecting the anticipated deterioration in COG’s credit quality and financial metrics.
Moody’s expects a heightened level of business risk from its upstream exposure will remain in the near term due to a challenging outlook under the weak oil price environment.
There is also increasing risk of non-cash impairment losses on its upstream assets, which will adversely impact COG’s financial profile and reduce its financial headroom relative to the rating tolerance levels.
The company’s upstream business accounted for 6.3% of COG’s total revenue in 1H 2015 and 16.6% of its total assets at end-June 2015. The acquisition of the upstream business in Canada was completed in July 2014 at a consideration of CDN235 million.
Furthermore, the prolonged delays in passing increased costs to non-residential customers in Qinghai Province over the last three years have significantly weakened the company’s profit margin and track record of cost pass-through in a timely manner. Qinghai Province accounted for around half of COG’s total gas sales over the past few years.
Nevertheless, Moody’s expects COG’s dollar margin to improve in 2016. As indicated by the company, its Qinghai projects finally received regulator’s approval for cost pass-through in December 2015 to partially rectify the delays in tariff adjustments in 2014 and 2015. The corresponding price adjustments to non-residential customers were effective on 1 January 2016.
As a result, Moody’s expects a moderate improvements in the company’s overall financial profile in 2016, which will remain in line with the current Ba2 rating level.
But Moody’s will review the implications on COG’s ratings, should there be any material deviation from these expectations.
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in Decemebr 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
China Oil and Gas Group Limited is mainly engaged in the piped city gas business in China. The company also expanded the oil and gas production business in Canada in 2014. Its revenue reached around HKD7.7 billion and HKD3.9 billion in 2014 and 1H 2015, respectively.
The company is listed on the Hong Kong Exchange. Mr. Xu Tieliang, the company’s chairman, is the largest shareholder, with a 22.1% stake.