China Petroleum & Chemical Corp. (386), Asia’s biggest refiner, joined PetroChina Co. in posting lower 2012 profits, as the nation’s largest energy companies look to overseas growth to counter the impact of price controls at home.
Net income at China Petroleum, know as Sinopec, fell to 63.9 billion yuan ($10.3 billion), or 0.71 yuan a share, from 73.2 billion yuan, or 0.81 yuan, in 2011, the company said in a statement to the Shanghai Stock Exchange. That compares with the 61.8 billion yuan mean of 26 analysts’ estimates compiled by Bloomberg.
Chinese energy companies are casting abroad for growth opportunities as declining domestic fields and government price controls weigh on profits. Despite narrowing their refining losses in 2012, costs for Sinopec and PetroChina are expected to increase as they are tasked with upgrading facilities to improve fuel quality and combat air pollution.
Sinopec’s refining business may have already become profitable in the fourth quarter of 2012, Simon Powell, head of Asian oil and gas research at CLSA Ltd. in Hong Kong, said yesterday. Sinopec doesn’t report quarterly refining numbers.
“Everyone is expecting refining business to be better this year, the big question mark is whether the petrochemical sector can show a recovery or not,” said Powell. “Capital spending may go up a bit in order to meet higher fuel standards, but it should not be a big burden as Sinopec can charge higher prices for higher grades.”
Units of Sinopec and its parent company China Petrochemical Corp., known as Sinopec Group, will form a joint venture to acquire overseas oil and gas assets owned by the parent for about $3 billion, to strengthen its reserves and production, Sinopec said in the statement. It will spend $1.5 billion on the venture, Sinopec said.
Sinopec will spend 33.8 billion yuan on refining this year, and “the focus will be on its fuel standards upgrade projects,” according to the state-owned refiner’s statement yesterday. In 2012, the company spent 32.2 billion yuan on refining.
Sinopec’s oil and natural gas production in 2012 rose 4.9 percent from the previous year to 428 million barrels, it said.
Sinopec’s parent agreed to pay Chesapeake Energy Corp. (CHK:US) $1.02 billion for a 50 percent interest in 850,000 acres Chesapeake controls in the Mississippi Lime formation, the company said Feb. 25.
Cnooc Ltd., China’s third-biggest energy company and its largest offshore oil and gas producer, in February won approval from the U.S. Committee on Foreign Investment to buy Nexen Inc. (NXY) for $15.1 billion, after the Canadian government approved the deal in December. The acquisition, which will add 20 percent to Cnooc’s production and 30 percent to its reserves, was passed after the company relinquished operating control of rigs in the Gulf of Mexico. The Canadian government had early said that future acquisitions in oil sands by state-owned foreign companies would be rejected barring “exceptional circumstances.”
After reporting lower 2012 profits on Friday, Cnooc (883) Chief Executive Officer Li Fanrong said the acquisition would be a platform for future growth and that Chinese companies will increasingly win foreign acceptance.
“State-owned companies like us have no difference with western companies in terms of business operations,” Li said. “China’s state-owned enterprises will be more and more welcomed by the host countries of natural resources.”
PetroChina and its parent China National Petroleum Corp., the country’s biggest oil and gas producer, have spent about $5 billion to add oil and gas assets globally from the beginning of the year.
Sinopec’s operating loss for refining reached 11.9 billion yuan in 2012, compared with a loss of 37.6 billion yuan in 2011, according to the statement. PetroChina Co. (857), the country’s second biggest refiner, lost 43.5 billion yuan on refining last year, narrowing from a loss of 60.1 billion yuan in 2011. The company reported lower 2012 profits on Thursday.
China increased fuel prices for first time since September on Feb. 25, raising gasoline by 300 yuan a metric ton and diesel by 290 yuan a ton. Gasoline and diesel prices are set by the National Development and Reform Commission under a system that tracks the 22-day moving average of a basket of crudes, comprising Brent, Dubai and Indonesia’s Cinta. The commission plans to shorten the fuel price adjustment window, former NDRC Chairman Zhang Ping said on March 6, without providing details.
“Refining margins will be helped by the price increase and sentiment should improve for the Chinese refiners, particularly Sinopec,” analysts at Sanford C. Bernstein wrote in a Feb. 25 note to clients.
After record-high levels of pollution blanketed Beijing in January, the State Council, China’s cabinet, said on Feb. 6 that the government will publish new standards for diesel in June and gasoline in December, capping sulfur content at 10 parts per million, with the rules being implemented nationwide by 2017. The statement named all three of China’s major oil companies.
The plan announced subsequently by Sinopec’s parent to upgrade plants to produce fuel with less sulfur would be negative for the company’s credit outlook, Moody’s Investors Service said.
“The increased capital spending of around 30 billion to 40 billion yuan will most likely be funded with debt,” Moody’s said in a report on Feb. 7. “We expect the company’s internally generated operating cash flow will be insufficient to cover its capex in 2013-14.”
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