Oil collapse leads S&P to downgrade China's state energy giants

China Petroleum & Chemical Corp and Cnooc Ltd, two of the country's biggest oil producers, were among Asian energy companies whose credit ratings were downgraded or put under review by Standard & Poor's after cutting its crude price forecast. 

PHOTO: AFP

JAN 26, 20168:42 PM

[HONG KONG] China Petroleum & Chemical Corp and Cnooc Ltd, two of the country's biggest oil producers, were among Asian energy companies whose credit ratings were downgraded or put under review by Standard & Poor's after cutting its crude price forecast.

S&P downgraded the long-term corporate credit ratings of the two listed Chinese oil companies and their state-owned parents as it lowered its Brent crude price forecast to US$40 a barrel for 2016 and US$45 for 2017. The lower estimate had no impact on the ratings and outlook for other state energy companies in Asia, including Malaysia's Petroliam Nasional Bhd and India's Oil & Natural Gas Corp, it said.

"We don't believe China's national oil companies will be able to stabilize their cash flow adequacy amid the current price environment despite their efforts to cut capital expenditure and costs," Lawrence Lu, an S&P credit analyst, said in a statement announcing the reviews.

Oil crashed below US$30 a barrel to the lowest in 12 years this month amid turmoil in Chinese markets and concern that Iranian exports are going to exacerbate a global oversupply. Crude's slump has prompted producers from Chevron Corp to Royal Dutch Shell Plc to delay investments and cut costs as they seek to weather the rout. Cnooc, China's largest offshore oil company, has said its output will fall for the first time in more than a decade this year as production slips amid lower investment.

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S&P has also downgraded Australian explorers Santos Ltd and Woodside Petroleum Ltd. It didn't change the rating for China National Petroleum Corp, the country's biggest producer.

"If crude prices stay at the current low level longer than expected, then a lot of companies including Cnooc and Sinopec will run out of cash," Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc., said by phone.

Moody's Investors Service on Friday placed 175 energy and mining companies, including Shell, Total SA and BP Plc, on review for a possible downgrade. The rating agency cut its Brent forecast to $33 a barrel, citing increased OPEC supplies and moderate global consumption growth.

Brent futures for March settlement rose 1.2 per cent to $30.86 a barrel in London on Tuesday.

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Slowing emerging markets hamper oil recovery: World Bank

JAN 26, 201611:22 PM

[WASHINGTON] The World Bank warned Tuesday that slowing emerging-market economies were hampering an oil recovery, and prices could sink further in a blow to a "fragile" global economy.

Crude oil in 2016 is projected to come in at US$37 a barrel, down from its October estimate of US$51, the World Bank said in a new quarterly report.

"A faster-than-expected slowdown in major emerging markets economies - especially if combined with financial stress - could further reduce commodity prices considerably, setting back growth in commodity exporters and the global economy," it said in the Commodity Markets Outlook report.

Oil prices fell below US$30 a barrel in mid-January to lows last seen more than 12 years ago amid a global oversupply and weakening demand.

The World Bank recently downgraded the growth projections for emerging-market and developing economies, after they slowed to a 3.3 per cent pace last year, their weakest showing since 2010.

Emerging-market economies have been the main drivers of commodity demand growth since 2000, a reason why their weakening growth prospects are weighing on commodity prices, the World Bank said.

"Low commodity prices are a double-edged sword, where consumers in importing countries stand to benefit while producers in net exporting countries suffer," said Ayhan Kose, director of the Bank's Development Prospects Group.

"It takes time for the benefits of lower commodity prices to be transformed into stronger economic growth among importers, but commodity exporters are feeling the pain right away." The World Bank explained its stiff 27.5 per cent downgrade on 2016 oil prices reflects a number of supply and demand factors that emerged in the past three months.

US oil production has shown greater resilience due to cost cuts and efficiency gains, it said.

Other factors cited include the "sooner-than-expected" resumption of Iranian oil exports after international sanctions were lifted and mild winter weather in the northern hemisphere that reduced demand for heating.

Oil prices, which fell by 47 per cent in 2015, are expected to decline at a slower pace, by an additional 27 per cent this year, the report said.

"The sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse," it said.

A recovery in the market would be gradual, the World Bank predicted.

It projected oil prices would rise to $48 a barrel in 2017, but that remains still well below $104 in 2013 before the market began its nosedive in the middle of the following year.

AFP

    
 

The bank stock analysts hate even after takeover defences eased 

Despite the watering down of the bank's anti-takeover defences, BEA's shares are down 6.8 per cent since that announcement, compared with the Hang Seng Index's 4 per cent loss. 

PHOTO: REUTERS

JAN 27, 20167:39 AM

[HONG KONG] One of Hong Kong's last remaining independent lenders last week dropped a shareholder agreement that had been a key plank in its defence against a potential takeover. Yet analysts aren't rating the stock as if an acquisition was on the horizon.

Bank of East Asia Ltd, co-founded by the family of Chairman David Li, is trading at close to the widest discount to its assets in seven years - a valuation that's almost a third of what the most recent bank deals in Hong Kong were struck at.

That gap means it's unlikely that Mr Li will get an offer he or his biggest shareholders can accept, according to analysts and investors.

"Buying Bank of East Asia means buying a banking license and the company's business in China," said Edmond Law, a Hong Kong-based analyst with UOB-Kay Hian Holdings Ltd. "But nobody is expecting the bank to put itself up for sale now. Why would the management sell itself cheap?"

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Dim prospects for a takeover and concerns over asset quality in China help explain why BEA is the most-unloved stock among analysts of the biggest publicly traded banks in the Asia- Pacific region, according to data compiled by Bloomberg.

The bank's China exposure prompted Goldman Sachs Group Inc. to reiterate its long-standing sell rating on BEA stock last Thursday.

It also explains why BEA shares failed to react to an announcement earlier in the week that its second-largest shareholder, Criteria Caixa SA, had been released from an earlier obligation to back the Hong Kong lender's board on any takeover bids it received.

HEADY VALUATIONS

Despite the watering down of the bank's anti-takeover defences, BEA's shares are down 6.8 per cent since that announcement, compared with the Hang Seng Index's 4 per cent loss. The bank's price-to-book ratio sank to 0.72 times on Thursday, a level last seen in March 2009, and far below the valuations of Hong Kong's two most recent bank takeovers.

The market's attitude toward a China-focused bank has shifted dramatically since the days when other Hong Kong banks were snapped up by overseas suitors at heady valuations.

Oversea-Chinese Banking Corp's 2014 acquisition of Wing Hang Bank Ltd was done at 2 times book, while China Cinda Asset Management Co offered 1.95 times to buy Nanyang Commercial Bank Ltd last year.

The chance of a BEA sale "is very slim," said UOB Kay- Hian's Law. "BEA would only sell if they are offered a very high price, higher than the previous banking deals in Hong Kong. Otherwise, they won't be interested."

Now, BEA's exposure to China, which represents about a third of its total lending, is seen in a less favourable light and helps explains the bank's lowly rating among analysts. None of the 15 analysts tracked by Bloomberg who follow BEA have buy ratings on the stock.

Eight recommend investors sell and the rest rate it a hold, giving BEA a consensus rating of 1.93 out of 5, the least among the Bloomberg Asia Pacific Banks Index's 56 members.

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The bank's nonperforming-loan ratio in China more than tripled to 2.65 per cent by June from a year earlier, higher than the 1.5 per cent average for the nation's banks the same month.

Brian Li, BEA's deputy chief executive officer, said in a September interview that the bank will take action on its China business that is "dragging down our overall performance."

Some analysts are skeptical if Criteria Caixa's new flexibility on considering bids will make a takeover more likely, given the bank's shareholding structure. The Li family owns at least 8 per cent of BEA, while Criteria Caixa holds 17.2 per cent through its CaixaBank SA unit, and Sumitomo Mitsui Banking Corp.owns 17.4 per cent. The condition won by the Spanish banking group is one that Sumitomo Mitsui already has.

Representatives for BEA and its two major shareholders declined to comment.

"The anti-takeover alliance formed by the Li family, the Spanish bank and the Japanese bank is still there," Francis Lun, chief executive officer of Hong Kong brokerage Geo Securities Ltd. "The looser shareholding requirement indeed leaves room for a possible takeover, but the alliance is strong enough to prevent a sale from happening."

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US: Stocks rise on higher oil, Fed speculation

PHOTO: BLOOMBERG

JAN 27, 20166:31 AM

[NEW YORK] US stocks rose solidly on Tuesday behind higher oil prices and speculation the Federal Reserve will conclude a meeting the next day with a dovish statement on future interest rate increases.

The Dow Jones Industrial Average rose 282.01 points (1.78 per cent) to 16,167.23.

The broad-based S&P 500 gained 26.55 (1.41 per cent) at 1,903.63, while the tech-rich Nasdaq Composite Index advanced 49.18 (1.09 per cent) to 4,567.67.

The gains came as US oil prices rose 3.7 per cent to US$31.45 a barrel. Analysts said strong earnings by 3M and other Dow members also lifted sentiment.

Market watchers also expect the Fed to signal Wednesday, after a two-day meeting, a go-slow approach to future rate hikes after lifting benchmark interest rates in December for the first time in more than nine years.

"There's some optimism ahead of the Fed tomorrow that we're going to hear some more dovish commentary and that future rate hikes will be data-dependent," said Michael James, managing director of equity trading at Wedbush Securities.

Petroleum-linked shares rose with oil prices. Dow members ExxonMobil and Chevron rose a respective 3.6 per cent and 4.0 per cent, while oil-services company Schlumberger advanced 3.2 per cent.

Other commodity-linked names gained, including copper miner Freeport McMoRan, which jumped 6.6 per cent, and aluminum producer Alcoa, which rose 5.0 per cent.

Banks were also strong, with JPMorgan Chase, Citigroup and Bank of America all adding around 2.5 per cent.

Dow component 3M leaped 5.2 per cent after reporting fourth-quarter earnings of US$1.66 per share, three cents above expectations.

Johnson & Johnson jumped 4.9 per cent after reporting fourth-quarter net income came in at US$1.44 per share, two cents above expectations.

Among other Dow members, Procter & Gamble rose 2.6 per cent following its earnings report, while DuPont climbed 0.6 per cent.

Insurer AIG rose 1.0 per cent as it announced plans to float nearly 20 per cent of United Guaranty Corporation and a number of other streamlining moves, along with US$25 billion in capital returns to shareholders. The moves follow pressure from activist investors Carl Icahn and John Paulson.

FirstMerit soared 18.4 per cent on news it will be acquired by Huntington Bancshares for US$3.4 billion in a deal that unites two banks in the midwestern state of Ohio. Huntington Bancshares fell 8.5 per cent.

AFP