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Chinese NOCs’ Profit, Cash Flow to Improve on Demand, Oil Price Recovery

Tuesday, 15 September 2020 | 23:00

China’s national oil companies (NOC) – China National Petroleum Corporation (CNPC; A+/Stable) and subsidiary PetroChina Company Limited (A+/Stable), China Petroleum & Chemical Corporation (Sinopec; A+/Stable) and CNOOC Limited (CNL; A+/Stable) – will report stronger profit and a cash flow recovery in 2H20, driven by higher oil prices than 1H20, stringent cost control, capex reduction and an increase in upstream production, Fitch Ratings says.

The NOCs’ revenue fell by 22%-32% yoy and EBITDA dropped by 36%-71% in 1H20, mainly due to a 65% drop in the crude oil price in 1Q20 from the previous quarter, and weak refining margins and demand in the downstream business segments. The oil price has more than doubled from the trough in April as of 10 September 2020, leading to our expectations of an improvement in upstream profitability in 2H20. Fitch recently updated our price-deck assumptions for Brent crude to USD41/barrel, USD45/barrel and USD50/barrel in 2020, 2021 and 2022, respectively.

The NOCs’ upstream production rose steadily, especially for natural gas, which had a milder decline in prices than crude oil. PetroChina’s oil and gas production rose by 5.2% and 9.4% yoy, respectively, in 1H20, despite an 11% cut in capex. PetroChina is focusing on increasing upstream natural gas production to capitalise on its leading position across the gas value chain. CNL’s production increased by 6.1% on the back of a 5.6% increase in capex, driven by strong natural gas production growth of 18.1%. CNL is on track to meet its 2020 production target of 505-515mmboe, and its medium-term target to reach 2mmboepd by 2025 will be supported by its new discoveries in the South China Sea and developments in China’s Bohai region.

The NOCs’ exploration and production cost control was better than we expected in 1H20. PetroChina’s lifting cost fell by 14% yoy while CNL’s all-in cost declined by 11%. We expect PetroChina to maintain tight control over costs after a pipeline restructuring to stay competitive in the core upstream business. CNL’s increase in low-cost domestic production led to lower costs and its strong domestic production growth momentum will provide room for further cost cuts.

CNL and PetroChina maintained their full-year capex guidance that was revised lower at the onset of the pandemic, while Sinopec cut its original guidance by another 10%, after a 5% yoy capex hike in 1H20, mainly to reflect lower capex on maintenance and low-efficiency production, which we expect to have a limited impact on production.

The NOCs’ downstream profitability improved significantly in 2Q20 from 1Q20 due to much lower inventory impairment losses and demand recovery. Sinopec’s and PetroChina’s marketing and chemical segment EBIT both returned to profit in 2Q20 after a 1Q20 loss. China’s refined-oil product consumption increased by 10.3% in July and the NOCs’ refining capacity utilisation recovered to above 75% from a trough of 59% in March.

We expect a continued demand pick-up, coupled with lower crude procurement costs that reflect the time lag in the inventory cycle, to further drive the downstream profitability recovery in 2H20.
Source: Fitch Ratings

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