If there is one sure thing about one of the worst oil price crashes in history, it is that not a single firm in the industry was immune to the collapse. Everyone is suffering: from small U.S. shale producers struggling to stay afloat to international oil majors cutting dividends, to national oil companies (NOCs) reducing investments to preserve cash while following government directives. China’s three state-controlled oil giants are no exception to this after the coronavirus and oil crisis swept across the industry just as Beijing had ordered its biggest oil firms to boost domestic oil and gas production to increase the energy security of the world’s top oil importer.
Analysts say that among the NOCs in Asia, the top three Chinese state-held firms – PetroChina, China Petroleum & Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) – have been hit the worst.
All three firms posted losses for the first quarter and cut capital expenditures (capex) for this year as the oil price collapse and the fuel demand crash dented their revenues.
Going forward, revenues are expected to continue to be weak this year, and losses will likely mount in the coming quarters. Longer-term prospects are brighter due to government support and orders for companies to boost oil and gas production in China.
Oil Market Volatility Hits China’s Oil Giants The Most in Asia
In the short term, it will be China’s NOCs that will suffer the most from the oil price crash among the state-controlled firms in Asia, data and analytics company GlobalData said in a report this week.
The impact of the low oil prices will be very high for PetroChina and Sinopec and high for CNOOC, analysts at GlobalData said.
PetroChina made the biggest capex cuts, by around 32 percent this year, while CNOOC suffered the most in terms of upstream cash flow.
“The China National Petroleum Corporation (PetroChina) and China Petroleum & Chemical Corporation (Sinopec) show the most significant upstream impact as cash flow is dramatically weakened under the current low oil prices and recent under-performance of reserve replacement efforts. The pair saw their 2019 debt levels increase from 2018 along with weakened debt to equity ratios coming into 2020,” said Cao Chai, Oil and Gas Analyst at GlobalData.
CNOOC, for its part, was found to be the most sensitive to low oil prices in terms of post-tax cash flow.
“The company also has one of the largest international exposures among the peer group with nearly half of the production coming from its overseas assets, which may mean additional exposure to disruptions and uncertainties outside of its home market,” Chai said.
China’s NOCs are now prioritizing the increase of domestic oil and gas production and cutting overseas operations, according to the analyst.
Losses Mount And Capex Cuts Accelerate
As oil prices crashed, CNOOC cut capex and production at its overseas assets in the U.S. shale patch and Canada’s oil sands. CNOOC reduced its annual net production target for 2020 from 520-530 million barrels of oil equivalent (boe) to 505-515 million boe. Total capex for 2020 was cut from US$12 billion-US$13.4 billion (85-95 billion Chinese yuan) to US$10.6 billion-US$12 billion (75-85 billion yuan).
Sinopec reported a loss for Q1, dragged down by the refining and marketing segments as China’s economy stalled, and demand for fuels crashed during the Chinese lockdown to contain the COVID-19 pandemic.
PetroChina, which also swung to a loss in Q1, said that “Facing this unprecedented and severe situation, the Company will highlight its key projects while constraining its non-major ones, insist on cutting cost as well as enhancing profitability, and adhere to the bottom line thinking of adjusting expenses based on income.”
China, as well as Australia, will see the biggest investment cuts due to the crash in prices, according to Andrew Harwood, Wood Mackenzie’s APAC upstream research director.
“In China, legacy oil areas suffer from old age and difficult geology. CNPC has been swift to announce cuts at many of its mature oil assets, with the Ordos Basin and the Daqing oil complex hit hardest. Other Chinese companies are deferring growth projects,” Harwood said.
In Asia Pacific, China’s NOCs are hit hardest in terms of cash flow and valuation, mostly due to their high-cost and mature oil assets, according to WoodMac.
“While upstream value has fallen by an average of 27% for the 20 largest Asia Pacific portfolios, for CNPC, Sinopec and Yanchang the drop is over 40%,” Harwood noted.
Short-Term Pain, Long-Term Gain
In the short term, all oil companies in China, including the small players and the NOCs, are set to suffer from the price crash, the economic downturn in the pandemic, and the efforts to contain it.
The finances of Chinese companies, including such in the oil industry, have been hit, and defaults in its so-called offshore bond market have accelerated in recent months.
According to Fitch Ratings, this year’s low oil prices will erode the upstream earnings of China’s state oil giants, although their production is expected to stay relatively stable with some rationalization at higher-cost fields.
In the longer term, China’s push for boosting its energy security by increasing domestic production will support higher investments from the Chinese oil giants.
“Fitch thinks the long-term trajectory for capital spending among Chinese NOCs will stay intact, underpinned by the nation’s target to improve its energy self-sufficiency ratio, particularly for natural gas, in addition to ongoing needs to replenish reserves,” the credit rating agency says.