Doing Business In China
Saturday, May 10, 2008
High Test: China Oil Producers
BEIJING -- Surging global oil prices are bleeding China's integrated oil companies as they get squeezed by government policies to insulate the nation's consumers from higher energy costs. But analysts say shares in Chinese companies that specialize in exploring for oil still may be attractive to investors.
China has two big integrated oil companies that both produce oil and sell refined fuels: PetroChina and China Petroleum & Chemical, or Sinopec. They are feeling the pinch, caught between international crude prices breaching $120 a barrel and domestic fuel prices capped at much lower levels.
China's oil companies are ultimately controlled by the state and face political pressure to keep domestic markets supplied despite losses.
The rise in oil prices has been especially hard on the bottom line of Sinopec, China's biggest seller of fuel. Sinopec has to buy 72% of the oil it refines from other producers, leaving it dangerously exposed to state policies that prevent it from selling fuel for a higher price abroad.
In the first quarter, Sinopec's net profit fell 69% from a year earlier, its biggest decline since doing an initial public offering in 2000. Sinopec would have posted a loss for the January-March period if not for a 7.3 billion yuan ($1.04 billion) government subsidy.
PetroChina, China's biggest oil producer by volume, fared little better, with first-quarter net profit tumbling 31% -- even though it pumps most of the oil it sells, rather than having to buy it from other producers. It also is under political pressure to keep domestic markets supplied, even if it means losing money.
China-based oil production and exploration companies that aren't involved in refining or retailing fuel are getting attention because they are less exposed to domestic energy policy.
A top pick is Cnooc Ltd., China's main offshore-oil producer. It doesn't disclose quarterly net profit, but it has said first-quarter revenue rose 61% from a year earlier.
Last year, Cnooc had trouble hitting some of its production targets, partly because of bad weather such as a typhoon that damaged an oil field. But this year, the company looks on track to increase oil and gas output 15% from 2007.
Another company well-positioned to take advantage of China's oil demand without the burden of continued government price caps is Citic Resources Holdings Ltd., whose primary asset is an oil field in Kazakhstan.
While the oil industry faces challenges stemming from rising costs of harder-to-produce oil fields, the Chinese face the added risk of government owners that sometimes put social goals ahead of the bottom line.
"We believe forecasting PetroChina and Sinopec's earnings has become an art form as widening refining losses have precipitated frequent policy adjustments," Kevin Koh, an energy analyst at Goldman Sachs Group, wrote Tuesday.
China has two big integrated oil companies that both produce oil and sell refined fuels: PetroChina and China Petroleum & Chemical, or Sinopec. They are feeling the pinch, caught between international crude prices breaching $120 a barrel and domestic fuel prices capped at much lower levels.
China's oil companies are ultimately controlled by the state and face political pressure to keep domestic markets supplied despite losses.
The rise in oil prices has been especially hard on the bottom line of Sinopec, China's biggest seller of fuel. Sinopec has to buy 72% of the oil it refines from other producers, leaving it dangerously exposed to state policies that prevent it from selling fuel for a higher price abroad.
In the first quarter, Sinopec's net profit fell 69% from a year earlier, its biggest decline since doing an initial public offering in 2000. Sinopec would have posted a loss for the January-March period if not for a 7.3 billion yuan ($1.04 billion) government subsidy.
PetroChina, China's biggest oil producer by volume, fared little better, with first-quarter net profit tumbling 31% -- even though it pumps most of the oil it sells, rather than having to buy it from other producers. It also is under political pressure to keep domestic markets supplied, even if it means losing money.
China-based oil production and exploration companies that aren't involved in refining or retailing fuel are getting attention because they are less exposed to domestic energy policy.
A top pick is Cnooc Ltd., China's main offshore-oil producer. It doesn't disclose quarterly net profit, but it has said first-quarter revenue rose 61% from a year earlier.
Last year, Cnooc had trouble hitting some of its production targets, partly because of bad weather such as a typhoon that damaged an oil field. But this year, the company looks on track to increase oil and gas output 15% from 2007.
Another company well-positioned to take advantage of China's oil demand without the burden of continued government price caps is Citic Resources Holdings Ltd., whose primary asset is an oil field in Kazakhstan.
While the oil industry faces challenges stemming from rising costs of harder-to-produce oil fields, the Chinese face the added risk of government owners that sometimes put social goals ahead of the bottom line.
"We believe forecasting PetroChina and Sinopec's earnings has become an art form as widening refining losses have precipitated frequent policy adjustments," Kevin Koh, an energy analyst at Goldman Sachs Group, wrote Tuesday.
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