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Chinese Petroleum
Corp. 'twAAA' Rating Affirmed; Outlook Stable
RATIONALE Taiwan Ratings Corp. today affirmed its 'twAAA' long-term corporate credit rating and unsecured corporate bond issue rating as well as its 'twA-1' short-term rating on Chinese Petroleum Corp. (CPC). The outlook on the corporate credit ratings is stable. The ratings on CPC reflect the company's dominant position in Taiwan's energy sector, extensive distribution network, domestic monopoly in natural gas, and good cash-flow protection measures. It also factors in support from the government of Taiwan (rated AA-/Stable/A-1+ by Standard & Poors' Rating Services) given CPC's strategic importance to the energy supply and overall economic growth of the island. These strengths are partially offset by the highly volatile and cyclical nature of the oil industry, the company's reliance on imported crude oil, and increasing competition. In addition, like many state-owned enterprises in Taiwan, the company has a relatively high cost structure compared with companies in the private sector. CPC is 100% owned by the government of Taiwan and comes under the supervision of the Ministry of Economic Affairs (MOEA). In terms of revenue, it is Taiwan's largest corporation. CPC has a refinery capacity of about 770,000 barrels of oil per day, representing about 64% of Taiwan's domestic production. The company is also a major feedstock supplier to Taiwan's petrochemical industry. In addition, CPC accounts for 85% of the island's petroleum market, and is the only natural gas supplier in Taiwan. The MOEA plans to reduce its stake in CPC to less than 50%. However, the process has been consistently delayed and the exact timing of the privatization exercise is uncertain. Given CPC's dominant position in domestic energy supply and its consequently important place in Taiwan's overall economic growth, Taiwan Ratings believes the company will continue to play an important policy role in the island's industrial sector. The government support factor in the ratings will not be affected if the government reduces its ownership to less than 50%. CPC's strong market position is backed by its extensive distribution network. Although deregulation has led to new competitors entering Taiwan's petroleum industry, such as the Formosa Plastics Group, CPC remains the leading distributor of all major petroleum products in Taiwan. At the end of June 2004, the company had 1,759 self-owned and franchised service stations, representing a market share of 72%. Strategically located storage capacity and extensive pipeline networks continue to safeguard the company's competitive advantages, as competitors have difficulty acquiring the necessary land to establish networks in good locations. CPC currently owns and operates the island's sole liquefied natural gas (LNG) import terminal at Yungan in southern Taiwan and is contemplating building another in central Taiwan having secured a 25-year LNG supply contract with Taiwan Power Co. (twAAA/Stable/twA-1). The sales and earnings contribution from the LNG division is expected to grow as more gas fired power plants begin operations over the next few years. As Taiwan has limited energy resources, CPC, and the Formosa Plastics Group, rely heavily on oil imports. As a result, the company generally adjusts its domestic sale price for gasoline to match that of international oil price movements, although such movements are not always fully and timely reflected. CPC posted robust earnings growth in 2004, as a result of substantially higher margins in petrochemical and oil divisions. Total revenue for the first six months of 2004 rose 23% year-on-year to reach NT$264.8 billion, with net income climbing 232% year-on-year to NT$11 billion. Operating margin—before depreciation and amortization—improved to 9.3% in the same period from 7.5% a year earlier. The company's cash flow protection measures strengthened further in 2004 because of higher profitability and cash flow generation. Its EBITDA interest coverage jumped to 53x in the first half of 2004 from 36x in 2003, while its ratio of funds from operations to total debt rose to 83% from 67% over the same period. Taiwan Ratings expects CPC to continue to maintain good cash flow protection measures over the medium term. Liquidity. CPC has good liquidity. As at June 30, 2004, the company had cash on hand and short-term investments totaling NT$24 billion, compared with total debt due within one year of NT$18.5 billion. CPC's liquidity is also supported by total available short-term credit facilities of NT$57.6 billion and US$2.28 billion, of which only 8% had been used. The maturity profile of CPC's long-term debt is relatively even, spread between 2005 and 2008. OUTLOOK: STABLE The
outlook reflects that the current up cycle of refining and petrochemical
industry should allow CPC to report good profitability and strong cash
flow protection measures over the next two years.
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