Why Chinese oil firms are bucking the oil slump
Oil companies around the world are gritting their teeth as the ongoing slump in crude prices cuts into their profits, but Chinese national oil firms may be immune to the energy rout, new reports suggest.
China's three major national oil companies - China National Petroleum Corporation (CNPC), Sinopec (Shanghai Stock Exchange: 688-SZ) and China National Offshore Oil Corporation (CNOOC) - all of which have upstream and downstream operations, will be resilient to oil declines, Moody's said in a report this week.
Crude's 50 percent plunge since June will hurt profits in exploration and production (E&P), Moody's said, noting cash margin per barrel is expected to halve to $32-$39 from $65-$73 in 2013 if Brent prices remain at $55. However, business diversity, strong liquidity cushions and conservative capital spending practices will help cushion the blow from profit losses, it said.
Chinese state-owned energy firms have already joined their global peers in slashing capital spending. On Tuesday, CNOOC announced it will cut expenditure up to a maximum of 35 percent this year. PetroChina (Shanghai Stock Exchange: 1857-SZ) and Sinopec are widely expected to follow suit when they release annual earnings next month.
Gero Farruggio, head of APAC upstream research at Wood Mackenzie, also voiced a positive outlook: "Even with challenges, we expect an eventful year with several positive developments on the political and fiscal front. These will not only act to soften the blow but renew interest in upstream exploration in the [Asian] region," he said in a note.
CNOOC may seem like a winner in the sector as it boasts the strongest balance sheet among Chinese state-owned enterprises, but a sharp earnings decline will be unavoidable if oil remains lower for longer, Barclays warned.
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"CNOOC cut capex more than we expected but it is unlikely to be enough to offset the fall in cash flow," Somshankar Sinha, the bank's oil and gas analyst, said in a recent note.
In fact, CNPC is best positioned to weather the oil price decline because of its lower E&P production cost, larger natural gas businesses, and diversification into downstream businesses, according to Moody's.
Government fiscal incentives in the form of tax breaks for exploration businesses are also expected to help Chinese national oil companies.
"China has already implemented changes that reduce taxes for contractors in a lower oil price environment, which will provide some relief," Wood Mackenzie said.
Meanwhile, Beijing's reform of state-owned entities may provide an additional boost. Last year, China announced a slew of reform programs aimed at increasing private investment into multiple sectors, including oil. These "infusions of private capital will also cushion the impact of lower E&P profits," Moody's said.
"The companies' overall credit quality, as reflected in their Aa3 ratings, will remain stable. This stability stems from the high likelihood of extraordinary support from the Chinese government," Moody's noted, referring to CNPC, Sinopec and CNOOC.
