New world of woes for China's trio of oil companies

The big three oil companies are learning to live with idea that crude prices may not recover soon. China Petroleum & Chemical Corp (known as Sinopec), PetroChina Co and CNOOC Ltd are cutting spending and controlling costs to cope with crude's plunge in the past seven months that has already crimped 2014 earnings.

Fu Chengyu, chairman of Sinopec, said on Jan 15 that profit from exploration and refining "fell off the cliff" in the fourth quarter.

"Chinese explorers have to find a way to deal with low prices rather than hoping for a sudden rebound to save them," said Shi Yan, an analyst at UOB-Kay Hian Ltd in Shanghai. "Low crude prices are here to stay."

The old way of doing business of relying on increasing production and boosting refining margins was "dead", Fu said in a Jan 16 statement on the Sinopec's website. Brent crude, the benchmark for half the world's oil trading, has fallen 46 percent in the past seven months.

PetroChina may post a 53 percent profit decline in the fourth quarter, while Sinopec may see a 77 percent drop, according to a research note from JPMorgan Chase & Co on Jan 18.

CNOOC, the nation's biggest offshore oil and natural gas producer, which has no exposure to refining, may report a 48 percent decrease in second-half earnings, according to JPMorgan.

"Fourth-quarter earnings will probably be just 20 percent that of the third quarter," said Gordon Kwan, Nomura Holding Inc's Hong Kong-based head of regional oil and gas research. "Earnings for these companies can be downgraded by 80 percent for the rest of the year if oil remains at these levels."

Based on $60 a barrel crude for 2015, Barclays Plc has forecast that PetroChina, CNOOC and Sinopec's annual earnings to drop 44 percent to 73 percent.

CNOOC will cut capital spending by as much as 35 percent to about 70 billion yuan ($11 billion) this year, the State-owned offshore explorer said after its annual strategic preview meeting on Feb 3.

China Petrochemical Corp, Asia's biggest refiner and Sinopec's parent, plans to "more strictly" control capital investment and refining costs, Fu said.

The Chinese companies are not alone. The global oil industry, including Halliburton Co and Schlumberger Ltd, has cut more than $40 billion in spending and fired 50,000 or more workers to cope with oil prices.

BP Plc, Statoil ASA and BG Group Plc have written down almost $20 billion in asset values.

Units of PetroChina's parent China National Petroleum Corp need to "tighten belts for hard days" in 2015 and "win the war on cost-cutting", General Manager Liao Yongyuan said on Jan 6.

Spending cuts may not be enough. PetroChina plans to shut unprofitable chemical projects and reduce crude output at its aging field in the northeastern city of Daqing. Sinopec is seeking to enter new areas such as clean energy generation, new materials research and 3-D printing for growth.

It has not helped that production costs for Chinese oil companies increased over the past few years as they pursued the development of smaller, marginal fields to boost volume, according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

PetroChina and Sinopec's production cost is probably about $50 per barrel, and CNOOC's is $45 per barrel, according to Beveridge's estimates. That means at a crude price of $50 a barrel they will not turn a profit.

The impact of crude prices has taken a toll on the shares of the Chinese oil companies. CNOOC shares fell 22 percent in the past six months, while Sinopec's declined 18 percent and those of PetroChina fell 16 percent.

But these are very large companies and the hand of the government cannot be underestimated, said Kai Hu, vice-president at Moody's Investors Service Inc, which rated all three Aa3, the second-highest investment grade, in a Feb 3 report.

"The stability in the companies' credit quality stems from the high likelihood of extraordinary support from the Chinese government," Hu said. "The oil companies' business diversity, strong liquidity cushions, likelihood of more conservative capital spending and the infusions of private capital and mixed ownership reform will also moderate the impact of the significantly lower exploration and production profits."

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