CNOOC Profit Falls as Oil Collapse Outweighs Cuts

Photo: CNOOC

By Aibing Guo

(Bloomberg) — Cnooc Ltd., China’s biggest offshore oil and gas explorer, said first-half profit slumped as higher output and lower costs were overwhelmed by a collapse in crude prices.

Net income dropped to 14.73 billion yuan ($2.3 billion), or 0.33 yuan a share, from 33.59 billion yuan, or 0.75 yuan, a year earlier, the Beijing-based explorer said in a statement Wednesday. That exceeded the 13.9 billion yuan average of three analyst estimates compiled by Bloomberg.

Cnooc cut capital expenditures by 31 percent in the first half of the year as oil explorers from Australia to Texas reduced staff and slashed expenses amid the worst market collapse since the financial crisis of 2008. The strategy paid off last year for the Chinese company, when it reported a surprise 6.6 percent increase in profit. The company has no plans to lay off employees, Chairman Yang Hua told reporters.

The spending cut was “in line with guidance, reflecting increased capital discipline in a challenging commodity price environment,” said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

Net production in the period rose 14 percent to 240 million barrels of oil equivalent. Cnooc, which depends heavily on oil exploration and production for revenue, is most exposed to the price plunge among China’s oil majors and must rely on cost cuts and capital spending curbs to boost profit, said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC.

Oil twice entered a bear market since mid-2014 as a flood of output from North American shale regions, the Persian Gulf and deepwater fields outpaced consumption. Producers from the Organization of Petroleum Exporting countries have committed to sustaining output to save market share while growing energy self-sufficiency in the U.S. has made more crude available globally. Shares rose 1.9 percent to close at HK$8.06 before earnings were released.

More than half a trillion dollars of value has been wiped from the five biggest international oil companies — Exxon, Shell, Chevron, Total and BP — since mid-June last year. The industry is the worst performer in the MSCI World Index this year.

Brent crude has averaged about $59 a barrel in the first half of the year, down 45 percent from the same period in 2014. The benchmark for half of the world’s oil this month slipped below $45 a barrel for the first time since 2009, and was trading at $43.32 at 3:34 p.m. in London. The Bloomberg Asia Pacific Oil and Gas Index has fallen about 24 percent this year.

Hard to Accept

Cnooc reiterated its plans to increase production by as much as 15 percent this year to as high as 495 million barrels of oil equivalent, while cutting capital expenditure by as much as 35 percent to 70 billion yuan. Five of its seven new upstream projects have begun operations and its made six new discoveries, the company said Wednesday. Oil and gas sales fell to 77 billion yuan in the first six months from 117 billion yuan a year ago.

“The development of the company in the future will be driven by both production and economic efficiency instead of only by production volume,” Hua said in the statement. “Looking forward to the second half of the year and beyond, the company expects the severe operating environment to continue.”

Hua, who was appointed chairman in May, said the company wouldn’t cut staff to reduce costs.

“In Western countries, laying off employees to save cost is a universally accepted action,” Hua told reporters after the earnings were release. “But in our Chinese culture, it will be hard to accept for employees and for society at large.”

Production in Canada, where the company’s Nexen subsidiary operates, fell 15 percent to 10.5 million barrels of oil equivalent. Cnooc bought the unit in 2012, when Brent averaged more than $110 a barrel.

–With assistance from Sarah Chen in Beijing and Angelina Rascouet in London.

©2015 Bloomberg News

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