First-half results underscore the magnitude of a spending pullback by China’s oil majors

Chinese oil companies say they are bracing for a turbulent second half and no relent of the low oil prices that have sent their earnings plunging.

Amid weak global economic growth that is constraining demand for everything from oil to natural gas and iron ore, first-half results on Wednesday underscored the magnitude of a spending pullback by China’s oil majors.

In releasing interim results, Chinese oil companies Cnooc Ltd. and Sinopec Corp. said they had little expectation for a sharp rebound in oil and natural gas prices.

“There is little optimism in the world’s macro-economic environment,” Cnooc Chairman Yang Hua said in a statement. “International oil prices are expected to remain at a low level.”

Cnooc predicted a “severe operating environment” for the rest of 2015 after reporting a steep drop in first-half profit.

The company also said it was on track to meet planned cost cuts this year to deal with plummeting resource prices. Cnooc said total capital spending fell nearly one-third to 33 billion yuan in the first half, and that it was on track for 70-80 billion yuan in capital spending this year.

“Cnooc are responding well to the challenge of lower oil prices,” Bernstein Research analyst Neil Beveridge said.

The company, which has major operations offshore China as well as overseas, said first-half net profit plunged 56% to 14.7 billion yuan. The result beats a consensus mean estimate of analysts polled by S&P Capital IQ of 13.3 billion yuan.

Revenue fell to 77 billion yuan, down more than one-third from the same period of 2014. The company reported an interim dividend of 25 Hong Kong cents per share, flat from 2014.

Mr. Beveridge noted Cnooc raised its payout ratio to its highest on record, which he said would be positive for the company’s struggling stock. Cnooc shares in Hong Kong are down by nearly a quarter so far this year.

In many ways, Cnooc wants to pump its way out of market challenges. The company said it managed to stave off an even bigger decline in profit by ramping up production this year.

Total production jumped 13.5% in the first half, led by big crude production gains in China’s Bohai Bay and in the eastern South China Sea. Natural gas production fell slightly, reflecting low prices and weak demand in China due to slowing growth.

That strategy is in contrast to Sinopec, which said total oil-and-gas production fell nearly 2% in the first half after cutting out what it described as “high-cost oil production.” Sinopec said net profit fell 22% to 25.4 billion yuan. Sinopec said it cut total first-half capital expenditures to 23.5 billion from nearly 40 billion in the same period last year.

The drawback by China’s big oil companies follows years of expansion around the world, as they scooped up expensive assets from Canada to Africa and Australia.

Today, many of those high-cost projects face challenges. That is particularly true in the case of Cnooc, which presents itself to the industry as the most global of China’s oil companies. Cnooc said in the first half that its overseas oil-and-gas production grew only 4%, down from more than 20% growth the year before.

Cnooc is facing particular challenges in Canada, where it acquired oil-and-gas producer Nexen Inc. in 2013. Cnooc said its total Canadian production fell by 15% in the first half.

Separately, the company said Wednesday it was not yet able to provide an estimate on the cost of cleanup and remediation related to a large Nexen pipeline leak in Alberta in July.

Source: www.wsj.com

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