Two of China’s state-owned oil companies, PetroChina Co Ltd (SEHK: 857), China Petroleum & Chemical Corporation (SEHK: 386), also known as Sinopec, reported a painful net loss for the first quarter of 2020.
The losses were so big that they almost completely erased the companies’ earnings from a year ago. Meanwhile, CNOOC Ltd (SEHK: 883) said it escaped a net loss in the first quarter, but just like every other oil producer, it is cutting production targets for the year and slashing costs.
However, the quarter-long ire may soon come to an end for crude oil as lockdowns are being gradually lifted all over the world.
While the global demand for oil may slowly bounce bank, what does it mean for China’s three oil giants?
Short-term revival unlikely
PetroChina reported a net loss of RMB 16.2 billion (US$2.28 billion) in the first quarter of 2020, compared with a net profit of RMB 10.2 billion in the same period a year ago.
Similarly, Sinopec announced that it had lost RMB 19.78 billion during the first quarter this year, while its profit for the same period in 2019 was RMB 15.47 billion.
CNOOC did not disclose a full annual report, but announced that the company escaped a net loss in the first quarter. It also added that measures such as slashing capital expenditures and other costs will be inevitable.
These losses are not likely to be filled in the near term. As we approach the half-year mark going into June, it is clear that recovery of activities to the pre-Covid-19 level will take a lot longer than once imagined. Across industries, some companies are already writing off 2021.
Economies around the world have contracted, sending shockwaves through global supply chains. Borders remain mostly shut, and air travel – which consumes fossil fuel – mostly restricted.
On top of that, the US-China trade war is far from over, and mounting tariffs will have dire consequences on the price of products being exported, including oil and relevant products.
When cost-cutting meets production targets
Despite the global demand for oil reaching a low point, Beijing has announced two rounds of export quota allocations to date this year, according to a report by S&P Global.
Apparently, it hopes for a head start on the playing field with other oil producers in the region, as soon as the demand curve sees an upward trend.
On the other hand, since oil companies are cutting their costs to avoid even wider losses, the targeted quotas could further strain their business.
This means that production would have to continue even if there was another crude oil rout, narrowing the profit margin.
They are also under pressure to keep the jobs in their company – an obligation particular for state-owned enterprises (SOEs) that are directed by the Chinese government.
In fact, China’s oil giants were already slow in their reaction to cutting costs and capital expenditures because, unlike the private sector that has a market-centric approach, SOEs answer to the government and act on its orders.
Is the oil industry going south?
In recent years, it also has become an increasingly popular and less contentious argument to make that the oil industry is going downhill.
Environmental and climate concerns have driven countries increasingly towards renewables, and investor activism aims to move capital out of the sector.
Some analysts even predicted that the demand for fossil fuels may already have peaked, and 2019’s highs will never be seen again.
Certainly, the end result largely depends on real policies and the way the world’s economies recover from Covid-19, but such talk no longer seems outlandish.
Even China is upping its goals for wider use of renewables, despite the fact that fossil fuels still dominate electricity generation, and power millions of cars, in the country.
Foolish conclusion
To what extent this lip service paid on renewables will translate into implementation and transformation of the energy sector still remains a question.
However, investors should be aware that buying these state-owned, blue-chip oil stocks may not guarantee steady streams of income to infinity and beyond. The world after Covid-19 will only add to that uncertainty.