MOODY'S: CHINA BUYS CANADA
Moody's Investors Service says that the completion of China Oil and Gas Group Limited's (COG) acquisition of oil and gas fields in Canada will have no immediate impact on the company's Ba1 ratings or stable outlook.
On 24 July 2014, COG announced that it completed its acquisition of Baccalieu Energy Inc (unrated) -- which owns and operates oil and gas fields in Canada -- for a consideration of CDN235 million. The company funded the consideration by internal resources.
"COG's foray into the operation of oil and gas fields will introduce higher business risks, owing to the high risks associated with such a business," says Ivy Poon, a Moody's Analyst.
The higher business risks will likely stem from the inherent uncertainties in development and production, Baccalieu's small operating scale and limited geographical diversity, the volatility of commodity prices, Baccalieu's limited sources of liquidity, as well as the integration risks.
In Moody's view, the higher business risk will push COG to the lower end of its Ba1 ratings category.
"However, COG's higher risk profile is somewhat counterbalanced by the moderate improvement in its projected metrics over the next three years, as its newly acquired assets exhibit healthy cash flows, underpinned by increasing production levels and manageable leverage," says Poon.
Moody's takes comfort from:
- the regulated piped gas business will remain a dominant cash flow contributor, representing 75%-80% of projected consolidated EBITDA,
- Baccalieu's modest credit quality,
- Moody's expectation of fairly stable oil prices over the next 1-2 years, and
- COG's improving credit metrics.
Baccalieu's daily production is projected to be 5,912 barrels of oil equivalent (boe) in 2015 and 7,285 boe in 2016 by GLJ, from 4,244 boe in the first quarter of 2014, according to the reserve report from GLJ Petroleum Consultants as of 31 December 2013. The production mix will remain healthy, with the ratio of light oil and natural gas liquids to natural gas at 70:30.
At 31 December 2013, the reserve life for the proven and developed reserves and the total proven reserves were estimated at 5.2 years and 11.4 years, respectively.
Moody's expects Baccalieu to generate annual funds from operations totaling CDN55-CDN85 million, compared to an annual capex of CDN65-CDN80 million over the next three years. Its operating cash flows will therefore be adequate to fund the majority of its capex, without the need for substantial financing.
On a consolidated basis at COG, Moody's expects the company's retained cash flows-to-debt to improve to 20%-30%, and debt/capitalization to stay at 40%-45%.
Nonetheless, Moody's has revised the rating triggers for COG to tighten the credit monitoring to reflect the increased business risk from its new oil and gas business.
In addition to the current rating triggers for the piped gas business, downgrade pressure would emerge if: (1) COG is required to provide significant financial support to Baccalieu, and (2) Baccalieu's daily production and reserves fall materially, such that COG's retained cash flow/ debt falls below 15%-20% and debt/capitalization exceeds 50%, for a prolonged period.
Upward rating pressure would be limited in the near term, given the recent acquisition. Moreover, Moody's has tightened the financial indicators for an upgrade; such that debt/capitalization will have to measure less than 35%, and retained cash flow/debt exceeds 25%-30%, on a sustained basis.
The principal methodology used in this rating was the Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
China Oil and Gas Group Limited engages in the piped city gas business, as well as the transportation and distribution of compressed natural gas, and liquefied natural gas in China.
The company is listed on the Hong Kong Exchange. Mr. Xu Tieliang, the company's Chairman, is the largest shareholder, with a 21.81% stake.
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