Daily Brief Utilities: China Oil And Gas and more

We view China Oil and Gas (COG) as “Medium Risk” on the LARA scale. This takes into account: [1] regulatory risk, with the company having experienced over three years of delays in cost pass-throughs for tariffs in Qinghai (albeit these have since been resolved); [2] COG’s exposure to oil price volatility in the small upstream oil & gas segment; and [3] the company’s track record of aggressive debt-funded acquisitions, albeit management has said that it is not keen on increasing indebtedness for expansion or acquisitions.

COG’s main asset is its 51% interest in downstream gas provider China City Natural Gas, with the remaining 49% held by Kunlun Energy, a subsidiary of SOE PetroChina. Hence, cash leakage from dividends is significant. We believe the relationship with Kunlun helps secure COG’s gas supply and improves the company’s ability to obtain gas distribution concessions. In addition, PetroChina’s parent, China National Petroleum Corporation, previously provided financing to CCNG at competitive rates.

Our Credit Bias on COG is “Stable”, given the company’s solid revenue growth from natural gas sales and distribution, despite volatilities associated with the upstream oil exploitation and production business. COG has historically maintained a sound liquidity profile and reasonable access to funding. That said, we remain cautious over the financial performance of Shandong Shengli (for which COG is the single largest shareholder at 22%). This is as COG has provided guarantees for Shengli’s banking facilities, which could impact COG’s credit profile.  

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”.