Moody’s affirms China Oil and Gas’ Ba3 rating, changes outlook to stable

Investing.com -- Moody’s Ratings has today confirmed the Ba3 corporate family rating (CFR) and senior unsecured rating of China Oil and Gas Group Limited (COG). The outlook has been revised to stable from negative.

The update in the outlook is supported by the company’s recent initiatives to address corporate governance concerns. This includes the prompt publication of its 2024 financial results and steps taken to eliminate an external loan guarantee commitment, according to Boris Kan, a Vice President and Senior Credit Officer at Moody’s Ratings.

The affirmation of the rating indicates Moody’s expectation that COG’s operational and financial performance will maintain stability at its current Ba3 CFR. However, the company’s corporate governance risk remains high, says Kan.

Governance considerations are a key factor in the rating action, with high risks associated with the company’s loans to its associate.

COG reported its 2024 full-year results on March 21, 2025, complying with the Hong Kong Stock Exchange’s reporting requirements. The company’s revenue declined by 4.7%, while net profit rose by 84.5% year-on-year. The total gas sales and transmission volume grew by 3.2%. These performances were largely consistent with Moody’s expectations.

The company’s retained cash flow (RCF)/debt was 14.6% and funds from operations (FFO) interest coverage was 3.6x during the period, which are within the rating parameters of its Ba3 CFR.

The outstanding corporate guarantee provided to Shandong Shengli, a 22.16%-owned associate of COG, has been reduced to zero since January 2024. Moody’s believes the company will not extend such a guarantee in the future, which is a credit positive.

However, COG has an outstanding shareholder loan to Sino Director Limited, a 17.5%-owned associate that operates certain coal mine assets in Shandong province. These operations are outside of the company’s core city gas business and entail higher risks.

COG’s Ba3 CFR reflects its steady but slower growth in gas sales volumes over the next two to three years, supported by positive industry policies. The expected reduction in future capital spending in new projects would relieve the company’s leverage.

The rating also takes into account the company’s high risk appetite, including its investments in its associates, namely Shandong Shengli and Sino Director, overseas upstream operations, and weak liquidity at the holding company.

In terms of environmental, social and governance (ESG) factors, Moody’s considers COG’s governance risk to be high, considering its previous investments and the delay in publishing its FY2023 annual results.

Upward rating pressure could emerge over time if COG establishes a proven track record with timely cost pass-through for its city gas projects; shows increased diversification in revenue, such that Qinghai province contributes to less than 30% of its total revenue; and strengthens its corporate governance framework.

Downward rating pressure could occur if COG’s corporate governance risks are heightened, including a substantial increase in loans to Sino Director and/or other associates. Other factors that could result in a rating downgrade include a significant increase in the risks associated with COG’s overseas upstream operations, aggressive debt-funded expansion projects or acquisitions, adverse regulatory changes, or additional funding support to its upstream business and its associates. Weak liquidity will also trigger a downgrade.

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