CNOOC Ltd.

The stable outlook on CNOOC Ltd. reflects the outlook on the sovereign credit rating on China. It also reflects our expectation that the company will maintain its dominant position in China's offshore oil and gas E&P industry for the next 12-24 months at least. Improving oil prices and CNOOC Ltd.'s stringent cost control have resulted in a large buffer for the rating. We could downgrade CNOOC Ltd. if its parent CNOOC Group's debt-to-EBITDA ratio rises above 2.5x for a sustained period. This could happen if oil prices drop significantly, CNOOC Ltd.'s operating expenses and capex surge, or the company pursues large debt-funded acquisitions. We could also lower the rating on CNOOC Ltd. if we downgrade China. We could raise the

...Improving reserve life to provide higher visibility over increasing production growth. CNOOC Ltd.'s reserve life improved to 10.5 years in 2018, from 8.7 years in 2015 because of higher oil prices and oil discoveries. All this led to an enhanced reserve replacement ratio (RRR) of 126.0% in 2018, from 305.0% in 2017. With China's focus on national energy security, we expect the company's increased exploration to further extend its reserve life, improving visibility over increasing production growth. Higher capex will result in lower free operating cash flows. The Chinese government has called for higher capital expenditure (capex) in domestic exploration and production (E&P) to lift domestic oil and gas production for energy security. We therefore expect CNOOC Ltd.'s capex to increase to Chinese renminbi (RMB) 80 billion in 2019, from RMB63 billion in 2018, and remain high over the subsequent two years. Given that capex will take time to turn into operating cash flows, we forecast the company's...

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