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China Oil & Gas:Larger than expected capex cuts, but challenges to reducing opex, limited visibility on natural gas pricing

研究机构:摩根大通(亚太) 研究员:Scott L Darling,Michael Stansfield,Parsley Rui Hua 发布时间:2015-01-23

J.P. Morgan's China energy tour to Beijing and Shanghai surprised us as to theextent to which profitability may have declined for some segments of ChinaOils over the last month or so. While the industry will cut FY15 capex, thereseems to be limits on materially reducing opex. With many of our coveragecompanies’ portfolio cash breakevens being above our oil price forecast (seenote), we see a very challenging outlook. China Oils seem to expect oil prices torecover in 2H (most have c$60-70/bl FY15 planning assumptions), and moreworryingly for the cash outlook, all mentioned continued screening for potentialacquisitions to take advantage of any distress in some parts of the oil industry.

Overall our trip re-iterated our cautious view on the sector and we ratePetroChina/Sinopec (N) and CNOOC (UW).

Managing cost base is likely to take time: We expect China Oils to cut capexby around double-digits this year. PetroChina and Sinopec seem more likely tocut than most (largely by delaying downstream/chemical projects), whileCNOOC is still assessing its capex FY15 target (strategy update 3 Feb).

However, there seems to be no plan for job or salary cuts at the SOEs and theindustry seems to only guide to flat opex y/y in FY15 unlike international peerswhich are in more aggressive cost cutting mode.

Natural gas price uncertainty, unconventional subsidy may be extended:There were mixed messages on the outlook for natural gas prices from theSOEs, but independent producers suggest prices "hold steady" or slightly risethis year, although declining in the medium term. Shale gas/CBM subsidy islikely to be maintained from FY15+ according to many producers, but there islimited visibility on introduction of a new tight gas subsidy.

Oil services squeezed further; Hilong more defensive: COSL (N) may still benegotiating with CNOOC on day rates, which we estimate may be down c10-15% y/y this year, although this still needs to be finalised (strategy update: 4Feb). While COSL's balance sheet is relatively unconstrained and the companyaims to reduce costs this year, rig cancellation risk even for existing contractsremains, in our view. Hilong (OW) sees no evidence of downward pricingpressure due to its more defensive leverage to the energy service part of thevalue chain rather than drilling like COSL. Hilong sees CNOOC being activeoffshore, not only from projects sanctioned last year, but also for FY16+.

Re-structuring may accelerate: PetroChina highlighted its pipeline businessmay be re-structured in a "more comprehensive way", not just Eastern part WEPI & II, although the company would not provide details. Sinopec suggested retailIPO this year is unlikely, but seems to have no plans on further pipelinedivestments (note).

Storage almost full in China; oil demand growth robust: Sinopec land oilstorage is almost full and the company sees limits to incremental storage at thecountry's SPR. Sinopec forecasts diesel demand flat/slight increase due to sloweconomic growth and FY15 gasoline demand to grow by high single digits.

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