Fitch Affirms Sinopec at 'A+'; Outlook Stable
The ratings of Sinopec are equalised with those of the People's Republic of China (China; A+/Stable), in line with Fitch's parent-subsidiary linkage methodology. This is due to the strong strategic and operational linkages with the state via its parent China Petrochemical Corporation (Sinopec Group).
KEY RATING DRIVERS
Strong Sovereign Linkages: Sinopec is 72.94% owned by Sinopec Group, which is wholly owned by the State-owned Assets Supervision and Administration Commission of China (SASAC). Sinopec is the most valuable asset of the group, accounting for about two-thirds of the group's assets and over 90% of group consolidated revenue. Sinopec Group has management control over Sinopec and they are operationally linked. The group has received significant government support, including sizeable annual capital injections and subsidies.
State Linkage Intact Despite Re-organisation: Sinopec has undertaken a series of corporate restructuring exercises, including the sale of 29.99% of its marketing business to a group of private investors. Sinopec Group injected its oilfield services business into a group listed company. Fitch considers these transactions to be in adherence to the government's directives to increase private-sector participation in the economy, and a continuation of the group's strategy to enhance its corporate structure and diversify funding sources. In Fitch's view, Sinopec's close linkage with the state remains intact despite these transactions, while credit metrics have improved with the cash received from the transactions.
Dominant Mid- and Downstream Operations: Sinopec is the country's largest producer and distributor of refined oil and petrochemical products with around 60% market share in sales of refined products and certain petrochemical products. Sinopec's retail network of over 30,000 service stations is also the largest in China, providing comprehensive coverage of the country. Refined oil product prices remain controlled by the state at the refinery-gate level despite fuel price reforms in 2013, and Sinopec plays a key role in any fuel price controls because it is the largest refined products producer and retailer.
Upstream Operations Still Relatively Small: Sinopec Group has been active in increasing its oil and gas reserves with material overseas acquisitions. Sinopec had proved reserves of 3.9bn barrels of oil equivalent (boe) at end-2014 (end-2013: 3.9bn boe), of which about 10% is located overseas. Nevertheless, Sinopec is still principally a mid- and downstream company with its own production accounting for less than 30% of its refining requirements. The expansion in the upstream segment will continue given Sinopec Group's role in meeting China's energy security goals.
Improving Credit Metrics: Fitch estimates Sinopec's FFO-adjusted net leverage improved to around 1.4x in 1H15, from 2.6x in end-2014, despite the sharp drop in oil prices. EBITDA from the upstream exploration and production segment more than halved during the period. This is due to a 2% production decline and much lower realised price. While its 2% oil production decline was within expectation, its flat gas production - attributed by the company to weakened gas demand in China - was lower than Fitch's expectations. Nonetheless, total operating EBITDA only declined by 12% in 1H15, cushioned by strong performance of the refining and chemical segment (refining margin up 16% yoy to USD7.7/barrel).
Its financial position was helped by the capital injection of CNY105bn from non-controlling interests to its marketing arm. The company has also trimmed capex - the budgeted capex for 2015 is 12% lower than that for 2014, and 1H15 actual capex spending declined by 40% yoy.
Standalone Credit Profile Remains Healthy: Fitch expects Sinopec to maintain a strong financial profile despite our assumption of narrower refining and chemical margins in 2H15 and beyond, and higher capex in 2H15 (1H15 capex only represents 17% of its full-year capex budget). Fitch expects Sinopec's FFO-adjusted net leverage to remain below 3.0x (2.6x in 2014), even though we expect Sinopec to continue to generate negative free cash flow in the medium term due to weakened operating cash generation and high capex (mostly in upstream).
Cash proceeds from the partial sale of the stake in the marketing business have reduced the need for external funding, thus softening the impact on its credit metrics from lower global oil prices. Sinopec's risks are largely those of a refining and marketing company, but with the benefits of diversification into upstream operations. Sinopec's strong operating profile and its robust financial profile places its standalone credit profile comfortably at 'BBB+'.
Fitch's key assumptions within our rating case for the issuer include:
- Fitch oil and gas price base case assumptions of USD55/bbl for 2015; USD65/bbl for 2016; USD75/bbl for 2017 and USD80/bbl for 2018.
- Upstream oil production in line with management guidance while incremental increase in gas production indicated in management guidance is discounted by 15%.
- Refinery throughput, marketing sales volume, and ethylene production volume per management guidance
- Capex per management guidance in 2015, and to rise with oil price increases thereafter
Sinopec's ratings are equalised with those of China.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A negative rating action on the sovereign
- Weakening of linkage between Sinopec and the state
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A positive action on the sovereign, provided the rating linkages between the state and the issuer remain intact
For the sovereign rating of China, the following sensitivities were outlined by Fitch in its
Rating Action Commentary of 31 March 2015:
The main factors that individually, or collectively, could lead to positive rating action include:
- Progress on structural reform oriented towards sustainable longer-term growth;
- Increasing evidence that the economy is adjusting smoothly;
- Greater clarity on the strategy to address the debt problem in the economy, including at local governments.
The main factors that individually, or collectively, could lead to negative rating action include:
- A sharper growth slowdown than currently anticipated, leading to a rise in unemployment and/or a materialisation of risks to financial stability;
- A rise in estimated general government indebtedness well above Fitch's current estimate;
- A change in policy direction that increased economic imbalances and structural vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment.