TEXT-Fitch release on CNOOC Ltd

(The following statement was released by the ratings agency)

July 21 - Fitch Ratings has today affirmed CNOOC Ltd's (0883.HK) (CNL) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A', Short-term foreign and local currency IDRs at 'F1', and its senior unsecured ratings at 'A'. The Outlook is Stable.

"CNL's credit quality remains strong on the back of the company's solid position to benefit from the sustainable energy growth in China and the high oil prices," said Matthew Kong, Associate Director in the agency's Asia-Pacific Energy and Utilities team. "While its performance could be negatively affected by a downturn in oil and gas prices as well as a potential economic slowdown in China, CNL's financial profile is expected to remain very robust, even under Fitch's stressed case scenario," added Mr. Kong.

With a strong position in China's oil and gas exploration and production (E&P) sector, CNL is vested with exclusive rights to explore and develop the country's offshore oil and gas resources. The company also benefits significantly from production-sharing contracts (PSCs) through its parent China National Offshore Oil Corporation (CNOOC), and has an option to acquire at no cost up to 51% interest in new oil and gas field discoveries in offshore China.

Fitch notes that CNL's proven reserves for oil and natural gas remain sound at 1.6 billion barrels and 1.0bn barrels of oil equivalent at end-2007, respectively, with a reserve replacement ratio of above 140%. Based on the production level in FY07, the agency expects CNL's oil and natural gas reserves to run for 12 and 29 years, respectively. The company's domestic reserves represented 83% of its total reserves at end-2007, while 17% of its reserves are accounted for by international reserves in overseas countries, including Indonesia, Australia and Nigeria.

CNL's financial profile has been consistently strong; it was in a net cash position at end-2007, while its debt to operating EBITDAR and FFO adjusted leverage stood very low at 0.28x and 0.33x at end-2007 (0.43x and 0.53x at end-2006), respectively. Fitch does not expect to see a material deterioration in CNL's financial profile at least over the next one to two years, given the sustainable demand growth for oil and gas from China, which would also continue to result in its average realised prices for oil and gas largely exceeding its lifting costs.

The agency also notes the favourable regulations surrounding CNL, including the company's exclusive rights to have PSCs for oil and gas fields in offshore China and the high barriers to entry into the Chinese upstream sector. While CNL is prohibited from contracting directly with foreign partners without its parent regarding E&P projects in offshore China, Fitch sees little risk from this indirect right to sign PSCs, given that CNOOC has shown strong commitment to CNL by transferring all its rights and obligations under PSCs to CNL. However, Fitch notes that the company would be negatively affected by any unfavourable regulatory changes, such as the introduction of the windfall tax; although it was still manageable when the tax was imposed in March 2006 (comprising around 21% of CNL's operating expenses in FY07, excluding crude oil and product purchases), with the company's operating EBITDAR margin remaining strong at 54% in FY07 (FY06:56%).

A major rating constraint is CNL's exposure to oil and gas price risks, given the company's upstream focus. Also, Fitch notes CNL's international operations are less diversified and less developed than those of major global oil companies, with its domestic proven reserves accounting for 83% of its total proven reserves at end-2007 and domestic customers representing more than 90% of its sales. Nonetheless, Fitch expects CNL's strong financial profile to provide the company with an adequate buffer against any potential economic and market downturn, and allow it to continue to pursue acquisitions to strengthen its reserve base.

Fitch has applied its methodology for public sector entities (PSEs) when assigning ratings to CNL. CNL is classified as a non-dependent PSE, primarily due to a lack of explicit written state support, coupled with its profit-pursuing nature. Nonetheless, the agency assesses the government's support as strong, noting its ready ability to support CNL and the strategic importance of CNL to the country's economy and energy security. Therefore, Fitch has applied a one-notch uplift to CNL's standalone rating.