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 stable.
"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)
