Standard and Poor's Ratings Services said on Monday that it had
raised its long-term corporate credit rating on China Petroleum and
Chemicals Corp. (Sinopec) to A- from BBB.
The rating was removed from CreditWatch, where it had been
placed with positive implications on July 26. The outlook is
"The upgrade reflects Sinopec's improving financial performance.
The company has benefited from high crude prices for its upstream
sector and increasing demand for chemical products," said Standard
and Poor's credit analyst Lawrence Lu.
Sinopec's earnings grew strongly in 2006, with income rising by
52.7 percent to 48.9 billion yuan and gross revenue increasing by
30 percent to 1,071.4 billion yuan. Its margin of EBITDA, the
abbreviation for earnings before interest, taxes, depreciation and
amortization, a key measure for operating cash flow, remained at 11
percent, the same as in 2005.
The upgrade also factors in the implicit support that Sinopec
derives from the government, given its strategically important role
of securing energy to meet growing demand for oil and gas.
Sinopec is considered to be a commercial institution under
Standard and Poor's government related entities rating methodology,
and the rating is based on the company's underlying credit quality
and government support.
The rating on Sinopec reflects the company's large and highly
integrated operations, with diverse assets and revenue streams; its
marketing and distribution network, which is the largest in China;
and the company's dominant market position in the production and
sale of refined products.
These strengths are offset by government controls on the
refining and marketing of refined products, which have contributed
to the loss in Sinopec's refining segments for the past two years;
service and material cost inflation in a high oil price
environment, which will continue to put pressure on Sinopec's
costs; and a mismatch between Sinopec's distillation capacity and
its own crude oil supplies.
In addition, Sinopec's debt leverage should remain high relative
to its domestic peers' as the company expanded, which could reduce
its financial flexibility.
Sinopec's ratio of adjusted total debt to total capitalization
was 45.1 percent in 2006, up from 42.5 percent in 2005.
The high debt leverage was mainly due to Sinopec's substantial
capital spending of about 80 billion yuan and acquisitions of 24
billion yuan. Capital expenditure in the first half of 2007 totaled
40 billion yuan.
(Xinhua News Agency November 6, 2007)