BEIJING: China’s once-freewheeling oil giants are singing a new tune: They’d rather sit on stockpiles of cash than produce more energy. As the commodities slump stretches into its third year with uncertainty over prices still rattling markets, earnings this week by China’s three big state-owned oil and gas companies had something in common. The companies all said capital expenditures fell far below budgeted levels in the first nine months this year.
Most dramatically, China Petroleum and Chemical Corp., also known as Sinopec, said Thursday that its capital spending in the first three quarters was under 25 billion yuan ($3.7 billion). By contrast, the company previously said it planned to invest around 100 billion yuan this year. Partly as a result, its cash stockpile jumped 40% versus where it was this time last year to more than 80 billion yuan. “It’s very difficult to put that money to work to get a good return,” said Neil Beveridge, analyst at Bernstein Research in Hong Kong. “They’ve got a big cash balance and I’m sure it’s burning a hole in their pocket because clearly the government will be looking at that and wonder why they aren’t investing more.”
The investment drop-off has spurred a steeper-than-expected cut in oil production by the companies—hitting sales revenue and boosting their imports of foreign crude. Sinopec said its domestic oil production slumped 14% in the first nine months, and accelerated in the latest quarter as the company pared back spending.
Similarly PetroChina Co., which reported third-quarter earnings on Friday, said its domestic crude output fell 5% on year in the first nine months, while capital expenditures fell 23% to about 114 billion yuan in the same period. Its cash stockpile jumped by about 25% in the first nine months versus a year earlier. The uncertainty over oil prices is an important factor in driving investment lower. Offshore producer Cnooc Ltd. was once China’s fastest-growing oil company, as it pursued deals world-wide. Today its capital spending in the first nine months has been half of what it budgeted for the year.
Oil output at its biggest production base in China’s Bohai Bay dropped about 10%, disappointing analysts. While the company said it didn’t expect oil prices to retreat from current levels, it also doesn’t think they will rebound sharply. “We are not very optimistic,” said Chief Financial Officer Zhong Hua, adding that the company didn’t plan to ramp up spending in the fourth quarter unless it saw a significant rise in prices. No doubt, part of the strategy is to protect cash flow and dividends that keep oil investors happy. Nomura on Friday praised what it called “improved capital discipline” from Sinopec as the company slashed investment.
China’s government has also been pressuring the oil companies to keep their spending in check, and to avoid risky investments and losses. Part of the problem is that China has relatively few oil fields that can be pumped profitably at current prices of around $50 per barrel. Aging and high-cost fields in China have led to huge losses for the exploration and production parts of Sinopec and PetroChina’s businesses in particular. Sinopec for example said its oil-and-gas exploration unit had an operating loss of nearly 31 billion yuan in the first three quarters this year, up from 4 billion yuan in the same period a year earlier.
Even if China’s state-owned oil companies wanted to increase domestic investment, they have limited options, said Peter Lee, oil and gas analyst at BMI Research. As a result, he said, “most of the focus will be on overseas activities” going forward. But overseas they face challenges as well. Oil-price volatility has divided potential buyers and sellers over the value of energy assets, which has made deal making difficult, say people close to China’s oil companies. One person close to PetroChina’s leadership said the company had been looking at deals from Africa to the Middle East and North America to boost overseas reserves, and said there would likely be an uptick in overseas purchases next year if oil prices remained under $60 per barrel.
