Chinese oil producing giants CNOOC (NYSE:CEO) and PetroChina (NYSE:PTR) announced their earnings results today, and in an age of spiking demand in China for oil as well as record prices per barrel, it probably wouldn't come as a shock to many that both companies' reports were sterling.
PetroChina's bottom line increased 17% over last year to $5.5 billion in net income (45.3 billion yuan), where CNOOC's increased 11% amid both price and production increases to $845 million (7 billion yuan). Both reports are for the first half of the year.
PetroChina, which makes about half of its money from actual oil production (the remainder coming from downstream activities), says that the high oil prices on the market make it economically feasible for it to increase its expenditures on exploration and production by 13%, having spent more than $6 billion. PetroChina's oil and gas output (measured by barrels and not by revenues) increased 2.7%, well below the 4.3% gains turned in by CNOOC. Similarly, CNOOC noted that it would continue to plow money into exploration.
As I've said many times in the past, investors must be very careful with Chinese companies. In April, I reported that CNOOC was placing "deposits" exceeding $800 million to a sister company for which investors in CEO have no stake. These are tantamount to high-risk interest-free loans of shareholder equity to a related company. Naughty, naughty.
Of note is that, unlike the U.S., the command economy in China means that the higher oil and gas prices at the wholesale level have not necessarily corresponded to higher retail prices. The state announced Tuesday that it would increase retail prices by 6% to respond to higher pricing -- refining margins in China have been deeply negative during the recent spike -- which is costly for the downstream companies such as Sinopec (NYSE:SNP). Contrast this environment to the American one, where the CEO of refining giant Valero (NYSE:VLO) recently noted that this was the best refiners have had it in as long as he can remember. (Valero was a June 2003 selection for the Motley Fool Hidden Gems newsletter. That's worked out well.)
China's industrial and consumer-driven boom is well documented, but as the government has been more concerned about inflation, it has not allowed retail prices to float. This means two things -- first, as we noted, downstream companies get crushed. But second, the producers such as CNOOC and PetroChina see higher demand levels than they might otherwise (assuming that there is some elasticity of demand at the retail level in China for gasoline and oil-based products). Higher demand equals higher prices, and one of the key factors that experts have blamed on higher petroleum prices worldwide is -- yep, you guessed it -- Chinese insatiability for oil, particularly because of the rise in automobile ownership. At present China imports more than 40% of all of its hydrocarbon needs, some from regional producers such as Petrokazakhstan (NYSE:PKZ).
As CNOOC's Chairman Fu Chengyu noted, the company anticipates that oil prices will remain quite high, which makes aggressive exploration economically feasible. CNOOC, as a pure E&P company, has fared better in current environments than either of its larger rivals, Sinopec and PetroChina. If crude prices drop because of more dependable global supply from places such as Nigeria, Iraq, and Venezuela or slackening demand because of slowing growth in China, CNOOC and PetroChina might be sitting on enormous capital investments with little potential for return, similar to what dogged the Texas drillers for more than a decade. But planning for at least stable demand in China seems like a pretty good bet, and its potential for continued explosive growth and dependence upon imports means that domestic exploration seems like a pretty sound use of funds.
Got an opinion on the budding juggernaut that is China? Come pick up the vine on the China Connection discussion board at Fool.com. Oil & Gas your theme? We've got you covered there as well.
Bill Mann owns shares in Petrokazakhstan.
