OREANDA-NEWS. Fitch Ratings says today that the rating linkages between Kunlun Energy Company Limited (KLE, A/Stable) and its ultimate parent China National Petroleum Corporation (CNPC, A+/Stable) remain intact following KLE's acquisition of 100% of PetroChina Kunlun Gas Co., Ltd (KLG). KLE's 'A-' standalone rating would depend on the transaction's funding structure as well as KLE's investment plans after combining with KLG.

Fitch views KLE as strategically, operationally and financially closely linked with CNPC, and therefore rates KLE one notch below CNPC. KLE has historically expanded through various asset injections by its parent. The proposed acquisition, which was announced on 28 December 2015, follows an announcement made on 25 November 2015 by KLE's 58.33% parent, PetroChina Company Limited (PetroChina, A+/Stable), of an integration between KLE and KLG. Fitch believes the transaction reinforces KLE's strategic importance to CNPC, and hence, KLE's 'A/Stable' ratings remain unchanged.

KLE's main business is gas transmission via its 60% stake in the Shannxi-Beijing Line, which is a main driver for the close rating linkage between KLE and CNPC. KLG's main business is in downstream city gas, and the combination of the two entities, together with the Shannxi-Beijing pipeline asset, will make KLE one of the largest downstream gas companies in China, with total gas sales of 15.7 billion cubic metres, based on both companies' 2014 sales and after deducting intragroup sales. The combined entity's business operations will span the mid- and down-stream gas value chain, including pipelines and gas transmission, city gas distribution and sales, liquefied petroleum gas, and liquefied natural gas. KLE has some upstream oil and gas exploration and production operations, but it has indicated it intends to dispose of these assets.

KLE's standalone credit strength, however, will depend on how the transaction will be funded, as well as investment plans of the combined entity. The acquisition consideration is CNY14.8bn, compared with KLE's cash on hand of HKD15.7bn (equivalent to about CNY13.2bn) as of 30 June 2015. Fitch does not expect the acquisition to strain KLE's liquidity because the payments will be made in stages - 30% at completion, 60% within six months of completion and the remainder within 12 months of completion - and the company has strong access to external sources of liquidity. Leverage, nonetheless, could rise if the company chooses to fund the acquisition primarily through debt. The company has not yet disclosed details of the combined entity's financial profile, its financing plans, or future investment plans.

The transaction will create a single platform for the CNPC Group's important gas strategy, which will result in a clearer structure for the group. Combining KLE and KLG will eliminate competition and overlaps in businesses and infrastructure between the two companies.

The transaction is subject to shareholders' approval and regulatory approvals. KLG will be fully consolidated into KLE after the transaction is completed.