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China's oil giants post first-half profits
(China Business Weekly)
Updated: 2004-08-31 14:06

High crude prices and strong local demand boosted the profits of China's oil sector in the year's first half, but government-capped petrol prices, cooling economic growth and rising costs threaten future earnings.

State-owned trio PetroChina Ltd, Sinopec Corp and CNOOC Ltd posted net profit increases last week of between 11-48 per cent for the six months.

Crude prices hit record levels recently, which, if maintained, will produce an even better second half.

But some analysts expect a weaker second six months, as pressures pile up for the two companies with big refining operations.

"PetroChina and Sinopec are integrated companies, and high oil prices could mean their upstream operations are better off, but they may face pressure in their downstream operations," said Bin Guan, analyst at Merrill Lynch.

The biggest of the three, PetroChina, has delivered more than US$5 billion in first-half net profit -- close to that produced by world No 4 Total, of France, and by US-based multinational ConocoPhillips.

Despite the bonanza, high oil prices also raise costs for PetroChina and Sinopec, which have big refining businesses.

The National Development Reform Commission last week raised benchmark gasoline rates by 240 yuan (US$29) a ton and diesel prices by 220 yuan (US$26.60) a ton. The price hikes represent about a 7 per cent increase over the previous level.

However, market watchers say the price rises are too moderate, and they worried profit margins of Chinese oil firms could come under pressure as crude prices rise.

Also, the central government's efforts to cool its economy mean growth in demand for petroleum and petrochemical products will slow in the second half of this year.

Car sales, for example, nearly doubled last year, but are expected to rise by just 20 per cent this year.

China, the world's second-largest oil consumer, needs to secure more hydrocarbons as surging demand outstrips supply growth.

The nation imports about 43 per cent of its oil, a figure expected to grow to 50 per cent in 2010. Domestic crude output rose only 1.9 per cent in the year's first half, while imports leapt nearly 40 per cent.

The oil trio have responded to the challenge by raising exploration and development spending, and analysts fear higher exploration and transportation costs may limit earnings growth.

Despite these concerns, high crude oil prices remain the core theme. Prices have surged this year, partly on voracious demand growth from nations -- including China and India -- and also because of actual and feared supply disruptions around the world.

They struck a fresh record, close to US$50 per barrel, earlier this month. Although the price declined last week to US$43.1 per barrel, it remained a high level compared with previous years.

"The outlook is an oil price story," said Norman Ho, fund manager at Value Partners, which oversees about US$2 billion.

"We are watching whether they will pay more dividends after cashing in from high oil prices, and (for) any new projects in the pipeline."

CNOOC, China's top offshore producer, kicked off the season earlier this month, and PetroChina and Sinopec followed.

Last week, CNOOC reported first-half net profit rose 11.2 per cent to US$850 million.

Shares in CNOOC have gained 22 per cent so far this year. They have been boosted by strong oil prices, a share split and share buyback.

Shares in PetroChina and Sinopec, however, fell 14 per cent and 17 per cent, respectively, during the same period, on worries that refining margins were under pressure.

Higher oil prices will be the main profit driver for CNOOC. The firm has set a target to pump 140-145 million barrels of oil equivalent (BOE) this year, up 7.5-11.4 per cent.

PetroChina and Sinopec are both expected to make provisions for obsolete assets in their chemical and upstream operations.

PetroChina, Asia's biggest oil company, reported net profit rose 17 per cent, to 45.3 billion yuan (US$5.47 billion).

The giant firm, which counts American stockpicking guru Warren Buffett among its investors, may also give an update on the progress of its massive west-east gas pipeline after its foreign partners recently withdrew from the project.

Asia's largest refiner, Sinopec Corp, which processed about 2.3 million barrels per day as of the end of 2003, did not reveal its report last week. But it is expected to see the sharpest first-half earnings gain of the three -- about 48 percent to 15.8 billion yuan (US$1.9 billion).

For the second quarter, earnings are expected to rise an even sharper 82 percent year-on-year for the company, whose shareholders include mutual fund giant Templeton.

Some investors worry strategic shareholder ExxonMobil, which has 3.65 per cent, may sell the holding. Other global majors cashed out of Chinese oil stocks earlier this year.

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