Fluctuating performance

Market attention is now focused on how the two companies will strive to improve performance this year.

Citi Group thinks PetroChina's net profit in 2008 will decrease by 22.8% to 112.4 billion yuan (US$16 billion), while the company's Q4 profit will be adjusted from 0.22 yuan (3.22 US cents) to 0.1 yuan (1.46 US cents).

Meanwhile, Shenyin & Wanguo Securities' research findings claim PetroChina and Sinopec's earnings per share will be around 0.3 yuan (4.39 US cents), a huge drop compared with the year before.

In mid-February Sinopec's performance forecast indicated a drop in the company's 2008 net profits of 50-70%, caused by last year's soaring oil price and government regulations. Its first-half report for 2008 shows net earnings decreased from 81.83 billion yuan (US$11.98 billion) to 53.62 billion yuan (US$7.85 billion), or a 34.4% reduction year-on-year.

The skyrocketing oil price in the first three quarters of 2008 certainly squeezed the two oil companies' profit margins. PetroChina's refineries began to turn a profit, but due to reduced market demand from a gloomy overall business environment, the company failed to maintain its sales.

'Q1 better than expected?'

Despite fluctuating performance from the oil companies in 2008, investors are primed to expect a Q1 improvement in the industry.

Data obtained by the journalist shows that CNPC (China National Petroleum Corporation, PetroChina's parent company) registered a pre-tax profit of 99 billion yuan (US$14 billion), a 27.8% decline year-on-year, suggesting that the slowdown is bottoming-out following a first-half drop of 39% in the Jan-June results.

Sinopec announced that its overall profits were improving steadily in January and February this year. In the two months, Sinopec processed 26.62 million tons of crude oil, accounting for 55.48% of the entire country's output volume, and 1.57% higher than last year.

Recovery has also been apparent in the petrochemicals sector in the first two months this year. Markets for synthetic fibers, fabrics, and plastics were vigorous, with rapid price increases. Particularly in February, the prices of synthetic resins, rubber, man-made fiber raw materials, and organic raw materials climbed by 5.64%, 14.97%, 13.32% and 9.24% respectively.

After four months in the doldrums, the international crude oil price eventually climbed above US$40 per barrel.

On March 19, WTI Light Sweet price in NYMEX's April futures market reached US$52.25 per barrel, up by more than US$4, the highest since December 1, 2008. In the meantime, Brent IPE went up by US$1.99 to US$49.65.

In the light of this, a report by Qiu Xiaofeng published on February 28 holds that an opportunity for the Chinese oil industry has arrived, which will be reflected in the oil giants' Q1 performance this year.

In his report, Qiu points out that since February 2009, the oil companies' production costs will have fallen sharply, based on the reduced international oil price. In this circumstance, oil refining will offer a major boost to Sinopec's performance, and its Q1 profits per share are expected to reach 0.17 yuan (2.49 US cents), up by 100% year-on-year.

However, the international oil price is also renowned for its unpredictability. Goldman Sachs & Gao Hua Securities' recent analysis thinks the oil price may not hold and that with sales still weak, the oil giants' profits may not as much as anticipated.

"PetroChina's A Shares/ADR is 15.4 times up on the estimated value of 2009, and the enterprise Value / debt-adjusted cash flow (EV/DACF) 5.5 times better. Sinopec's figures are 10.4 and 5.9, while the figures for China National Offshore Oil Corporation (CNOOC) are 12.6 and 6.3". In addition, this report maintains its sell rating of PetroChina's H Shares/ADR.

(China.org.cn by Maverick Chen, March 26, 2009)