China’s Oil Giants Are Reeling From The Price Crash
If there's one sure thing about one of the worst oil price crashes in history, it's that not a single company in the industry has been immune to the collapse. Everyone suffers: From small U.S. shale producers struggling to stay afloat to international oil companies that cut dividends, to national oil companies (NOCs) that cut investment to save money while following government guidelines.
China's three state-controlled oil giants are no exception after the coronavirus and oil crisis hit the industry, just as Beijing ordered its major oil companies to boost domestic oil and gas production to increase the energy security of the world's leading oil importer.
Analysts say that among the NOCs in Asia, the top three Chinese state-owned companies - PetroChina, China Petroleum & Chemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC) - were worst hit.
All three companies saw losses in the first quarter and reduced capex this year as the drop in oil prices and the fall in fuel demand weighed on their earnings.
In the future, sales are expected to remain weak this year and losses are expected to increase in the coming quarters. The long-term outlook is better due to government support and the order by companies to boost oil and gas exploration in China.
The volatility of the oil market hits China's oil giants most in Asia
In the short term, China's NOCs will suffer the most from the oil price crash among state-controlled companies in Asia, data and analysis company GlobalData said in a report this week.
The impact of low oil prices will be very high for PetroChina and Sinopec and high for CNOOC, GlobalData analysts said.
PetroChina made the largest investment cuts this year at around 32 percent, while CNOOC suffered the most from the upstream cash flow.
“The China National Petroleum Corporation (PetroChina) and China Petroleum & Chemical Corporation (Sinopec) are having the greatest impact on the upstream as cash flow is dramatically weakened by the current low oil prices and the recent underperformance of reserve replacement efforts. The pair saw an increase in debt in 2019 in 2019, and a decrease in debt to equity ratios in 2020, ”said Cao Chai, oil and gas analyst at GlobalData.
For its part, CNOOC was the most sensitive to low oil prices in terms of after-tax cash flow.
"The company also has one of the largest international exposures in the peer group, with almost half of its production coming from its overseas assets, which can pose an additional risk of disruption and uncertainty outside of its home market," said Chai.
According to the analyst, China's NOCs are now prioritizing increasing domestic oil and gas production and reducing foreign activities.
Losses increase and capex cuts accelerate
When oil prices collapsed, CNOOC cut investment and production of its assets overseas in the US shale field and in Canada's oil sands. CNOOC reduced its annual net production target for 2020 from 520 to 530 million barrels of oil equivalent (Boe) to 505 to 515 million Boe. Total investment for 2020 has been reduced from $ 12 to $ 13.4 billion (85 to 95 billion Chinese yuan) to $ 10.6 to $ 12 billion (75 to 85 billion yuan).
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Sinopec reported a first quarter loss dragged down by refining and marketing segments as China's economy stalled and fuel demand collapsed during the Chinese freeze to stem the COVID-19 pandemic.
PetroChina, which also posted a loss in the first quarter, said: “Given this unprecedented and serious situation, the company will highlight its key projects while restricting its no-bigger projects, insist on reducing costs and improving profitability, and on it Conclusion: Remember to adjust spending based on earnings. "
Andrew Harwood, Wood Mackenzie's APAC Upstream Research Director, will see the largest investment cuts in both China and Australia due to the drop in prices.
“In China, old oil areas are suffering from age and difficult geology. CNPC has quickly announced cuts to many of its mature oil reserves, with the Ordos Basin and Daqing Oil Complex most affected. Other Chinese companies are postponing growth projects, ”said Harwood.
In Asia Pacific, China's NOCs are hardest hit in terms of cash flow and valuation, mainly due to their expensive and mature oil assets, according to WoodMac.
"While the upstream value for the 20 largest portfolios in the Asia-Pacific region has fallen by an average of 27%, the decline for CNPC, Sinopec and Yanchang is over 40%," said Harwood.
Short-term pain, long-term gain
In the short term, all oil companies in China, including small businesses and the NOK, will suffer from falling prices, the economic downturn of the pandemic and efforts to curb them.
The finances of Chinese companies, including those in the oil industry, have been affected and defaults in the so-called offshore bond market have accelerated in recent months.
According to Fitch Ratings, low oil prices this year will undermine upstream profits from Chinese state-owned oil giants, although their production is expected to remain relatively stable with some rationalization in higher-cost areas.
In the long term, China's efforts to increase energy security by increasing domestic production will support higher investments by the Chinese oil giants.
"Fitch believes that the long-term path for Chinese NOK's investment spending will remain intact. This is underpinned by the country's goal to improve the energy self-sufficiency rate, especially for natural gas, and continue to replenish reserves," the credit agency says .
By Tsvetana Paraskova for Oilprice.com
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