Chinese oil giants face steep losses, set to cut production, dividends as Saudi Arabia stokes price war, analyst says
- PetroChina, Sinopec may trim production by 2 to 3 per cent this year to limit losses as oil prices slip below their break-even levels
- Shares of oil producers fell to multi-year lows after Saudi Arabia slashed oil prices, fanning price war concerns
The West Texas Intermediate (WTI) benchmark crashed as much as 33.8 per cent on Monday to US$27.34 a barrel, the biggest drop in about 29 years, after OPEC and Russia failed to agree on a joint production curbs through the end of 2020. Saudi Arabia promptly slashed its crude prices, stoking price war concerns.
The US brokerage on Monday slashed its 2020’s earnings per share forecast for PetroChina by 61 per cent, for Sinopec by 41 per cent and for CNOOC by half, as the stocks slid in Hong Kong. Beveridge expects all three to pay less dividends, although they will try to maintain their payout as a percentage of their earnings.
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“What makes things worse this time around is that we are facing a possible global recession amid the coronavirus pandemic,” said Neil Beveridge, senior analyst at US brokerage Sanford C. Bernstein. “It will take a few quarters to work this [oversupply correction] out.”
Beveridge estimates PetroChina and Sinopec’s break-even costs at US$50 to US$60 a barrel, and they face a big dent on their bottom line if oil prices are sustained at current levels. On the other hand, CNOOC’s production cost was at about US$30 during the first half of 2019, having declined from US$45 in 2013, according to company documents.
Saudi Arabia, the world’s second largest producer after the US, slashed its official selling prices and planned to boost average daily output by over 3 per cent next month, Reuters reported citing unnamed officials. Russia is the third largest oil producer while the Organisation of the Petroleum Exporting Countries or OPEC controls 30 per cent of world output.
“The market was estimating the magnitude of extra oil supply cuts to come out of the OPEC+ meeting,” Daiwa Capital Markets analyst Dennis Ip wrote in a research note. Instead, “Instead, no deal was reached. Russia rejected OPEC’s ‘all-or-nothing’ reduction ultimatum.”
The breakdown of negotiations between OPEC and Russia, which together control around 43 per cent of global output, is expected to spur the lowest-cost producing nations to grab market share by flooding the market with more capacity, Sanford C. Bernstein said.
Opec and Russia could raise production by 1.4 million barrels per day by year end from January, similar to that over 12 months following a similar breakdown in cooperation late 2014, according to Morgan Stanley commodities strategists. Average global production was 80.6 million bpd last year.
PetroChina slid 9.6 per cent to HK$2.72 at the close of trading in Hong Kong on Monday, the lowest since October 2003. Sinopec fell 2.8 per cent to HK$3.82, an 11-year low, while CNOOC slumped 17.2 per cent to HK$8.79, a level not seen since August 2017.
