CNOOC warns of 8 billion yuan loss after Canadian oil sands writedown

First ever red ink for state energy giant, underlining how hard market is being hit by falling oil prices

PUBLISHED : Thursday, 28 July, 2016, 8:53pm
UPDATED : Thursday, 28 July, 2016, 10:56pm

CNOOC, China’s dominant offshore oil and gas producer, has projected around 8 billion yuan (US$1.2 billion) in losses for the first half of the year, the company’s first red ink since it started being publicly traded in 2001.

Officials on Thursday blamed the further decline in crude prices and hefty asset impairment charges on its Canadian oil sands assets. The result would compare with a profit of 14.73 billion yuan in last year’s first-half.

CNOOC is considered the lowest cost producer among China’s three state-backed oil and gas giants, which highlights just how hard the industry has been by the ongoing global oversupply and low energy prices.

“The expected loss ... is mainly attributable to the further decline of the crude oil price ... as compared to the same period last year, and the impairment and provision recognised to reduce the carrying amount of certain oil and gas properties, including oil sand assets in Canada due to the adjustment in operating plan, to the recoverable amount,” it said in a filing to Hong Kong’s stock exchange.

Sanford Bernstein senior analyst Neil Beveridge said he believes the vast majority of the 8 billion yuan was attributable to the oil sands assets, however, which require much higher crude oil prices than CNOOC’s other projects to break-even.

He had previously estimated CNOOC’s first-half net loss to be HK$850 million due to lower oil prices, without taking into account the asset impairments.

Brent crude, the global benchmark, has averaged US$41.21 a barrel in the past six months, down 30.6 per cent year-on-year.

“The impairment is somewhat unexpected but not a total surprise,” he told the Post.

Fellow state-backed oil and gas giants PetroChina and China Petroleum & Chemical (Sinopec) have also suffered losses on their upstream oil and gas production operations this year and have cut back output.

But their upstream losses were offset by profits from downstream oil refining, gas distribution and chemicals production operations.

PetroChina posted its first-ever quarterly net loss of 13.78 billion yuan (HK$16.45 billion) for the three months to the end of March 31, but analysts expect it to book a slight interim profit thanks to one-off gains from a stake sale in its pipelines in Central Asia.

Beveridge did not expect a big share price reaction to CNOOC’s warning.

“It may have a slightly negative impact on Friday, but judging from investors’ muted reaction to the huge assets impairment warning of its sister firm China Oilfield Services (Cosl), it should not be a big share price reaction given the impairment is an accounting treatment and does not affect CNOOC’s cash flows.”

Cosl said in a filing to Hong Kong’s stock exchange last Sunday it expected to book fixed assets and goodwill impairment totalling 7.14 billion yuan for the year’s first-half, which will reduce its profit by that amount.

Cosl’s share price rose 1.3 per cent the day after its announcement, compared to a 0.6 per cent rise in the Hang Seng Index.

The impairment accounted for 7.6 per cent of Cosl’s total assets at the end of last year.

The impaired goodwill, the premium it paid to acquire an asset over its net asset value, stemmed from its acquisition of Norwegian peer Awilco Offshore in 2008, just before oil price crashed over the course of the global financial crisis.