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China's Days of "Stealing" the World's Oil and Gas Are Numbered

Developing the Western Oilfields of China (Source: PetroChina)

For years, China's oil companies PetroChina (NYSE: PTR  ) , Sinopec (NYSE: SNP  ) , and CNOOC (NYSE: CEO  ) have had a major advantage over their integrated major peers, which flummoxed competing oil companies. This advantage has allowed them to gobble up oil and gas assets around the world at premiums well above market price. Unfortunately for these Chinese companies, it looks like this advantage is ending, and they will need to compete with the rest of the world's oil and gas producers for assets. Let's look at what this advantage was, why it may no longer be there, and what this could mean for the energy markets.

Shopping with no credit limit
All three of these publicly traded companies -- and just about every Chinese company dealing with natural resources, for that matter -- are beholden to two opposing masters. Not only are they accountable to their shareholders, but they also have ties to the national government that "encourage" them to act in the best interest of the state. This dual identity gives these companies some very distinct advantages in the global markets, but some disadvantages when it comes to investment. 

These three Chinese energy companies have access to cheap capital through loans with extremely low interest rates. For perspective, ExxonMobil (NYSE: XOM  ) is one of only four companies in the world to hold a AAA credit rating from Standard & Poor's. That credit rating is even better than both the United States and Chinese governments. All three Chinese companies enjoy considerably lower interest rates on their senior notes.

Company Average Interest Rate on Senior Notes
ExxonMobil 6.27%
PetroChina 4.18%
Sinopec 2.76%
CNOOC 4.55%

Source: S&P Capital IQ, authors calculations.

I will admit, this is a pretty crude estimate because it doesn't take into account the duration of the bonds, which affects interest rates. Still, the wide difference in interest rates is rather remarkable.

This isn't the only reason that these companies have a leg up on the competition, though. Since the central government has a large say in what these companies do, they are not under as much pressure from shareholders to generate returns. 

Company Return on Capital (LTM)
CNOOC 11.4%
Sinopec 7%
PetroChina 6.2%
ExxonMobil 14.2%
Chevron (NYSE: CVX  ) 10.6%
Total (NYSE: TOT  ) 11.1%

Source: S&P Capital IQ.

Access to cheap capital allows companies like CNOOC to spend big on offshore projects (Photo Source: CNOOC Investor Presentation).

Keep in mind, this comes at a time when Big Oil players such as Exxon and Total are generating historically low returns on capital. When you combine access to cheap capital and a disregard for shareholder returns, these Chinese oil companies can outspend the competition to secure oil and gas. Just look at the record over the past few years:

  • 2011: Sinopec buys Canadian producer Daylight Energy for $2.1 billion, a 44% premium to market cost.
  • 2012: CNOOC buys Canadian producer Nexen for $15.1 billion, a 61% premium.
  • 2013: Sinopec buys 40% working interest in Permian basin with Pioneer Natural Resources for $1.7 billion, a 40% premium.

Not only is this detrimental to shareholders, it hurts the entire oil and gas market. Wildly overpaying for acquisitions drives up the price for other potential buyers, making it that much more difficult for a company such as ExxonMobil to make acquisitions. Perhaps stealing isn't the most accurate term for what China is doing, so instead we'll call it sabotaging the performance of your own company by overspending to ensure a source of oil at all costs. 

The bill has finally come due
Chinese President Xi Jinping has made it a priority to tackle corruption, and one way he is going about it is to reform these near-monopolistic industries in China. The goal is to make the nation a more attractive investment for private money to fund some of the massive development projects planned for coming years. This means that these companies will be more exposed to market forces and will therefore need to generate free cash flow to help fund development.

This has led to a reverse course in capital spending at each business, and even the divestment of major components. Both PetroChina and Sinopec have indicated that this year they will reduce capital expenditures by 5%-10% from 2013, and Sinopec is even looking to sell its $20 billion retail unit. Perhaps there hasn't been much media attention to this move, but it will have a significant impact on both the performance of these companies and the entire global market. 

Who wins, who loses?
China's overspending in recent years did a couple things: 1) It helped pad the pockets of many companies that did deals with the nation, such as Pioneer Natural Resources and a number of oil-services companies, and 2) It hurt other exploration and production players due to increasing prices for services contracts to increase, or the Chinese companies placing artificially low bids on production-sharing contracts in places such as the Middle East. 

As the trinity of Chinese oil companies start to act more like Big Oil players in pursuit of returns, we will likely see them become more cost conscious when it comes to contracting work, which will likely lead to a decrease in profitability for oil services and rig companies. At the same time, exploration and production companies will benefit from the more cost-competitive service contracts; it wouldn't be too surprising if they are able to generate stronger returns down the road as well.

What a Fool believes
With China mandating that its state-owned enterprises become more reactionary to market forces, many may struggle to become more market-driven than they are today. Overall, though, this will be better for the overall market by creating more competition among global oil producers. When all companies are competing on a more even playing field, everybody wins.

OPEC and Russia are absolutely terrified of this game-changer
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Read/Post Comments (27) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 5:43 PM, geoman4919 wrote:

    Although I do not approve of communist government, I approve of the action to secure ones economic future by buying the resources needed to power the society. The United States is incapable of planning anything except increasing the national debt.

  • Report this Comment On April 06, 2014, at 5:56 PM, urantiabob wrote:

    We need to get back the good old days when only UK and USA were allowed to steal the world's gas and oil.

    Of course they are both "good guys", and USA is an "exceptional" nation that can do no wrong by definition.

    Those darn Chinese need to understand that they are not "exceptional", and had better stop thinking they are.

    They need to check out Bush's announcement of the

    "New World Order", and learn to stay in their place.

  • Report this Comment On April 06, 2014, at 6:37 PM, Kummin wrote:

    Geoman - The ONLY reason they CAN do what they do, pay ridiculous premiums for other companies and not care is because they are told what to do by the Communist Government. Your comment is contradictory. If you want the US to be as 'future oriented' then it takes a Commie government to dictate the actions theses companies take. Otherwise they have to pay attention to market forces, shareholder expectations, etc.

    The article speaks of the Chinese oil companies like they're just any other capitalist company competing like any company in the Western world. Ridiculous.

    Urantiabob - pathetic leftie comment. Not even worth commenting on.

  • Report this Comment On April 06, 2014, at 7:08 PM, mastman23 wrote:

    I would much prefer business the China way rather than the American way. What you are saying here is western companies do not like to bid for resources. I can understand that they are spoiled. Here we just kill off a few thousand innocent people on 9-11 in a false flag operation and use that as an excuse to invade kill and destroy innocent people and take their OIL and hand it to the big oil companies under phony treaties.

    All funded by the Taxpayers who must bail out bankers and pay back the FED who prints endless supplies of free money for the banks so the cycle continues. Unless it actually starts WW3 and it could but then no one has to pay the bill assuming we win.

    You need to do some research on how Financial markets rule the roost here to. OH and BTW when the Chinese buy up these Canadian Oil and Gas companies some of us little investors actually make money on their high bids. That must really tee off your bosses in Wall Street.

  • Report this Comment On April 06, 2014, at 7:15 PM, Spiky wrote:

    LoL - talking about being an anxious white person. Sure let's go back to having the Anglos stealing EVERYTHING around the world - land, oil, other nations treasures, etc... financed by Jewish loan sharks embedded around the world. A marriage made in heaven... yep dream on. You had 200 years and your time is UP. Get used to your anxiety.

  • Report this Comment On April 06, 2014, at 7:26 PM, Shigekio wrote:

    This is a culture of lying and putting blames on their competitors when they cannot compete. This week, GM was fined only 30 millions for hiding switch problems for 7 years that killed numerous people. Whereas Toyota's non-brake problem was not duplicable though some accidents happened that could be due to drivers' faults or floor mate sticking problem; yet Toyota was fined a US$1 billion or 32.3 times more than GM and Toyota chairman was summoned by to testify at Congress where he was scolded and humiliated.

    In ordinary days, news media like this turkey here is doing his bad-mouthing to entertain himself and for his news boss - reflecting one dark spot of American behavior.

    Has this American and his news media won any respect from the reader with this arrogant and abusive headlines?

  • Report this Comment On April 06, 2014, at 7:32 PM, Shigekio wrote:

    Comment by a jerk with abusive language. LOL

  • Report this Comment On April 06, 2014, at 7:34 PM, ochairman wrote:

    Spiky, you are right. White people took Australia, New Zealand, S America,

    N America, islands around the world, Africa................. They don t want

    other poeple to take a bucket of water out of the ocean. The Chinese are making

    the white folks anxious all right.

  • Report this Comment On April 06, 2014, at 7:41 PM, S2013 wrote:

    How are they stealing it when as mentioned they are paying much more than market price"at premiums well above market price"??They are not paying below market prices nor getting dirt cheap the way the "Seven sisters "used to do.

  • Report this Comment On April 06, 2014, at 8:12 PM, Donc wrote:

    We don't like China stealing world resources.

    We just prefer we had stolen majority of lands, kill native people (Indians, Aborigines, ....), pillaged natural resources, murdered world population through our great colonization.

    Of course, we preached Human Rights afterwards to protect ourselves from those victims coming to our side.

    We are the most hypocrites of the world.

    Me being the epitome of our sermons, Tyler Crowe.

  • Report this Comment On April 06, 2014, at 8:26 PM, pepe135 wrote:

    i never thought overpaying is stealing everyday white people surprise me

  • Report this Comment On April 06, 2014, at 9:14 PM, mushifu wrote:

    I believe that this article is using the wrong word "Stealing".

    It seems that the writer has some kind of bias and sour grape minded narrow thinking brain.

    I will say the writer is brain dead.

    China pay the market price to beat western nations Big Boy Club "Old Oil Giant Empire" companies to secure their oil and gas supplies.

    Actually, these western Oil Giant Empire are the one stealing middle oil for centuries with cut throat price (< $1.00 per barrel).

    China is late comer to beat the western oil giant empire's unjust oil market monopoly rules which had been used to bully for years.

    The actual stealing word should be used on those western oil giant companies.

  • Report this Comment On April 06, 2014, at 9:34 PM, camarodan64 wrote:

    how much was exxon ceo paid last year compared to cnooc ceo

  • Report this Comment On April 06, 2014, at 9:58 PM, proudcolors wrote:

    why is it any time a non whit persons or company get a good deals on anything ,is cheated or steals.

    I use to like fool reports, but I am going block any from fool to my email or yahoo site............

    time that white people always good and right is over .

  • Report this Comment On April 06, 2014, at 10:37 PM, GaryDMN wrote:

    Oil is undervalued and the Chinese companies are smart to take advantage of oils unpopularity, in the western world. When an ex-President warns investors that "oil is dead money" and the US Energy Secratary and current President creating as many barriers as they can, while claiming higher energy prices would be good Americans, it effects pricing of assets. The Chinese are simply taking advantage of the endless worldwide propaganda campaign.

  • Report this Comment On April 07, 2014, at 1:35 AM, noseitall wrote:

    I must have missed the part where the article mentioned that Chinese companies also benefit from near-slave wages, and virtually no environmental restrictions. Surely no competent writer could have left that out.

  • Report this Comment On April 07, 2014, at 2:53 AM, wwayneharlan wrote:

    It seems that all the commenters have missed the point the author was pointing out, about the unfairness of these 3 so-called business being actually tools of the Chinese government and benefiting from cheaper than market financing through said government plus the fact they don't seem to be held to the same expectations of financial return as that of real market businesses. Or perhaps they all believe that governments should interfere in the free world market to give certain chosen companies unfair advantages over those that have to compete on their own without such government assistance.

  • Report this Comment On April 07, 2014, at 4:37 AM, v2snow wrote:

    spiky I agree with all the way.the American white trash are the far as iam concerned the only good one is a dead one.

  • Report this Comment On April 07, 2014, at 6:56 AM, petroguy wrote:

    Reading comments above from low IQ fools of the non-white race make me shake my head in wonder. White people have invented everything that has increased human life span and ease of life, and races other than Orientals are too stupid to understand something this obvious. I've worked in West Africa for years. Why don't you morons complaining about the Western way of life save up a couple of thousand dollars and buy a ticket to Nigeria, and enjoy life there? These savages would be happy to dump you in a pot and put you to the only use for which you have any value. Please die soon and save resources.

  • Report this Comment On April 07, 2014, at 8:42 AM, fingerlakes54 wrote:

    There is no reason for alarm. As the USA high tails it out of the troublesome Middle East--China and maybe combined with Russia will move in and take an active role in oil production and pricing for that region. By not settling the Israeli/Palestinian problem simply indicates the US has no interest or power in the Middle East anymore. It is too expensive to conduct business there when we have almost equal resources within our own borders. The fate of who carries the big stick in the Middle East is in transition. Things will be under new management within a couple years.

  • Report this Comment On April 07, 2014, at 9:49 AM, pebear wrote:

    So if these are publicly traded companies that will have to start to play by the rules. Their management will at sometime falter and their stock prices will come down to the point that someone else will be able to snap them up at bargain prices, like Exxon Mobile or whoever.

  • Report this Comment On April 07, 2014, at 11:21 AM, peterwolf wrote:

    In economics there are no free lunches. And the Chinese people have been paying for those foreign oil and gas assets in the form of substandard returns on their savings. How? The Chinese are big savers as we all know. But they put their savings into state run banks that pay artificially low interest rates so that the Beijing can 'borrow' the money from those banks to buy overseas assets. If Chinese rates were allowed to float to their true rates, Beijing couldn't 'borrow' that money so cheaply to overspend on foreign assets.

  • Report this Comment On April 07, 2014, at 1:39 PM, neotone wrote:

    And now with the U.S. Navy's breakthrough of creating fuel from seawater (in 10 years Navy ships will even be able to make their own aboard the ships that are using the fuel)'s going to get even more interesting.

  • Report this Comment On April 07, 2014, at 1:59 PM, jdmeth123 wrote:

    All major Chinese business can be considered extensions of the communist government. These purchases are part of their national defense. As we in the US know, when it comes national security, price is no object.

  • Report this Comment On April 30, 2014, at 10:58 AM, ywzhang111 wrote:

    yeah, right, ONLY the Western Imperialists are allowed by the god to STEALL EVERYTHING from Other nations.

    What a joke is this crap article!

  • Report this Comment On April 30, 2014, at 11:00 AM, ywzhang111 wrote:

    ALL U.S. Companies and Media Can Be considered extensions of the U.S. imperialist gov.

    Just look at what Snowden exposed, even a fool can get this conclusion.

    Oops, I forgot, many Americans like jdmeth123 are dumber than fools

  • Report this Comment On April 30, 2014, at 11:02 AM, ywzhang111 wrote:

    @ petroguy

    " from low IQ fools of the non-white race "????

    LOL. Every person who did some reading would know for a FACT that Eastern Asian have HIGHER Average IQs than Whites!!!!

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