Fitch: Spending Cuts, Strong Refining Cushion China NOCs' Cash Generation in 1H
Continued near-term pressure on oil prices, higher 2H15 capex relative to 1H15 and likely weaker refining margins in 2H15 are likely to result in some weakening of financial metrics by end-2015 compared with June 2015, reducing the headroom under their standalone credit profiles. However, all three NOCs' ratings remain stable due to their close linkage with the China sovereign (A+/Stable).
All three NOCs reduced costs in their upstream exploration & production (E&P) segment. CNL delivered the most reductions, with an 18.5% decrease in lifting cost, compared with 2.8% for PetroChina and 2.4% for Sinopec. The three NOCs' operating cash generation also benefited from a sharp drop in the special oil gains levy paid during 1H15 due to lower realised oil prices and a higher taxable threshold. The three companies paid an estimated total of CNY61m in 1H15 as compared with CNY60.6bn a year earlier.
Capex was also substantially reduced. CNL forecast a 26% reduction in capex for 2015, and actual spending in 1H15 fell 31% year-on-year. Sinopec guided a 16% reduction in capex for 2015, while PetroChina increased its forecast capex cut for the year to 13% from 9%. Nonetheless, both Sinopec and Petrochina only spent 17% and 24%, respectively, of their full-year capex budget during 1H15, implying cash outflow for capex during 2H would be much higher than 1H, if the companies spend according to their plans.
Production remained resilient in 1H15. PetroChina reported a 2.6% growth, but largely from its overseas projects, whereas, inauguration of new projects in offshore China accounted for most of the 13.5% increase in CNL's production. Sinopec's production fell slightly by 1.7% in 1H15, mainly due to weaker-than-expected gas demand. Fitch believes that the companies will continue to focus investments on projects with better economics in the short term, and reduce upstream investments, mostly in exploration activities and less-efficient projects. Therefore we expect limited impact on production in the near term; however, such rationalisation of investments is likely to affect longer-term production and reserve lives.
Earnings of the refining and chemical segment of the integrated operators - CNPC/Petrochina and Sinopec - increased strongly in 1H15. This trend, also observed for overseas refining and chemical players, stemmed primarily from strong product demand during the period. Sinopec's refining margin was up by 16% yoy to USD7.7/barrel, while PetroChina's refining and chemical segment achieved its first operating profit since 2011. The strong refining earnings partially mitigated the weak E&P segment's results for Sinopec and Petrochina, although we expect refining margins to moderate in the second half.
The three NOCs' credit metrics in 1H15 remained adequate for their respective standalone profiles, although headroom has reduced for CNL's and PetroChina's profiles in 2015 and 2016 under our oil and gas price deck. Although Sinopec's operating cash generation in 2H15 could be negatively affected by lower refining margins, its financial leverage improved at end-June 2015, with a lower working capital requirement from low oil prices as well as the capital injection of CNY105bn from non-controlling interests to its marketing arm.
CNL and Sinopec raised their dividend payout ratio for 1H15; however, we believe these companies would take a measured approach to dividends to manage their financial profiles amid continued low oil prices. All three companies maintain strong liquidity with strong cash balances (totalling CNY156.5bn at end-June 2015) and solid access to external sources of funds given their status as entities strongly linked to the state.
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