PETROCHINA: THE LOWEST
Brent has lost a quarter of its value from its peak in June. That's bad news for PetroChina Co. (857) and Cnooc Ltd. (883), which made most of their profit this year from oil and gas production. The shares dropped in today's trading.
PetroChina, the nation's biggest explorer, posted its lowest profit in eight quarters yesterday, while Cnooc Ltd., which only reports quarterly sales, saw a decline of 4.6 percent. The plunge in crude may cause PetroChina's profit margin to shrink and lead Cnooc, the country's biggest offshore oil and gas producer, to stop some high-cost projects.
"The negative impact from lower crude prices hasn't fully materialized yet as the prices in July and August were still OK," said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. "The fourth quarter will be really challenging for all upstream players if crude prices don't quickly rebound toward $100."
Brent, which peaked at $115.06 on June 19, averaged $105.9 a barrel in July and August. It dropped to $98.57 a barrel in September and $88.24 this month.
"The selling seems overdone," Linus Yip, a strategist at First Shanghai Securities in Hong Kong, said by phone. "Valuations are still OK. Even though the Chinese economy is slowing down, the long-term demand for oil is still there."
Cnooc dropped 4.5 percent to HK$12, the biggest fall since March 31, at the close in Hong Kong. PetroChina lost 1.9 percent to HK$9.65. The city's benchmark Hang Seng Index slid 0.5 percent.
Cnooc shares have a "high correlation with oil prices and its earnings carry a downside risk" if crude prices stay at $95 per barrel in 2015, Gordon Kwan, Nomura's Hong Kong-based head of regional oil and gas research, said in an e-mailed note today.
"Although Cnooc shares are not expensive based on price-to-earnings ratio or price-to-book ratio, we see no compelling catalysts emerging to lift the stock valuation ahead," Kwan said. He has a "reduce" rating on Cnooc with a target price of HK$11.4.
PetroChina's net income was 27.9 billion yuan ($4.6 billion), compared with 29.8 billion yuan in the third quarter ended Sept. 30, the Beijing-based company said in a statement to the Shanghai Stock Exchange. Cnooc's sales fell to 53.6 billion yuan from 56.1 billion a year ago.
The larger explorer's realized crude oil price was little changed at $99.93 a barrel in the first nine months from a year ago, the Beijing-based company said in the statement. The same measure fell 0.9 percent to $103.90 a barrel at Cnooc.
PetroChina cut capital spending by 7 percent this year in order to control costs and improve margins, which caused oil and gas production growth to slow to 2.5 percent in the first nine months of the year, compared with 4.3 percent in the same period a year earlier.
"We don't believe PetroChina will be able to grow upstream volumes without increasing exploration and production spending," Neil Beveridge, Kevin Lian and Lu Wang, analysts at Sanford C. Bernstein & Co., said in an e-mailed note today.
"With rising cost, lower oil price and slower production growth, we see limited organic earnings growth ahead in PetroChina."
Chinese explorers aren't alone. BP Plc (BP/), Europe's third-largest oil producer, this week reported a 19 percent slump in third-quarter profit. BG Group Plc (BG/), U.K's third-largest natural gas producer, posted a 29 percent net-income decline on weak oil prices and lower output.
China Petroleum & Chemical Corp. (386), Asia's biggest refiner and second-biggest oil and gas producer behind PetroChina, is expected to report earnings today. Its third-quarter net income may drop to 17.3 billion yuan from 22.1 billion in the same period a year ago, according the median of five analyst estimates compiled by Bloomberg. The stock fell 1.2 percent to HK$6.71.
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