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Chinese oil producers pump cash back to Beijing despite losses

Sinopec and PetroChina post first red ink and cut capex but still pay dividends

Sinopec's revenues tumbled during the first half of 2020 as the coronavirus pandemic undermined demand for oil products.    © Reuters

HONG KONG -- China's major state oil companies are keeping up their dividend payments despite incurring large losses as the coronavirus pandemic undercut the prices and sale of their products.

For China Petroleum & Chemical (Sinopec) and PetroChina, the net losses -- a combined 52.86 billion yuan ($7.72 billion) for the first half of 2020 -- are their first as listed companies and compare with posted profits of 59.76 billion yuan a year earlier.

Together with CNOOC, half-year revenues for the trio fell 27% to 2.04 trillion yuan. With sales receipts tumbling, the trio cut capital investment and other spending significantly.

Sinopec is facing "unprecedented difficulties and challenges," Chairman Zhang Yuzhuo told investors in an online results briefing Monday.

Yet his company and the other two will continue to pay substantial dividends to stockholders, with most of the cash going to Beijing which maintains a majority stake in the companies.

"Despite the difficulties we face at this moment, the company thinks highly of returns to shareholders and considered the big picture," Chai Shouping, PetroChina's chief financial officer, said at its earnings briefing Aug. 27.

Sinopec said it will cut annual capital spending 10% compared with last year, implying this year's figure will come in around 132 billion yuan.

PetroChina earlier revealed its annual investment budget this year as 228.5 billion yuan, down 23%. The smallest of the trio, CNOOC, has cut its capex allocation for this year to 75 billion to 85 billion yuan from an original range of 85 billion to 95 billion yuan.

All in all, total investment by the Chinese big three will be around 440 billion yuan, 16% lower than last year and the first decline in four years.

Yet CNOOC, which saw its net profit drop by 66% to 10.38 billion yuan, will still pay out 8.15 billion yuan as an interim dividend, though this will be 37% below last year's payout.

PetroChina intends to distribute 16 billion yuan to shareholders, a 12.6% increase from a year ago. Sinopec plans to pay out 8.5 billion yuan, or 42% less than last year, but it will send out the cash as a special dividend requiring approval from shareholders. For the first half, the two companies recorded negative free cash flow totaling 62 billion yuan.

As justification for the special dividend, Chai referred to the planned injection of Sinopec's natural gas pipelines into China Oil & Gas Pipeline Network, or PipeChina, a new company set up by Beijing to manage the national infrastructure.

The new company was established last December, with a framework agreement reached in July. PetroChina will be the largest stakeholder.

While giving up its pipeline assets, PetroChina is expected to receive a 29.9% stake in PipeChina and additional cash compensation of over 100 billion yuan. Sinopec will have a 9.4% stake and get cash compensation of 18.6 billion yuan. The transactions are set to take place at the end of September.

CNOOC will not initially be involved with PipeChina but Chairman Wang Dongjin told reporters on the company's earnings call on Aug. 19 that the company is studying whether to join in the future.

Handing over the infrastructure will enable oil producers to concentrate more of their capital spending on upstream development and alleviate financial pressure to further expand pipeline networks, Chai said.

However, gas providers such as PetroChina and Sinopec "will face more challenges selling natural gas in the future as downstream gas users [and] distributors will have more flexibility in procurement," Lawrence Lau, oil and gas sector analyst at BOCI Research in Hong Kong, wrote in a research note Friday.

Paying out dividends when conditions are severe serves as a way for the board of directors to show confidence about future prospects.

"We are confident that our performance will be better for the full year, and we believe we have the ability to deliver stable dividend payments going forward," Sinopec Chairman Zhang said Monday.

The stock market reacted favorably to Sinopec's announcement, as its shares rose 2.6% Monday in Hong Kong. PetroChina and CNOOC each gained less than 1%.

S&P Global Ratings said Monday following the latest results that Sinopec's financial performance "should improve in the second half of the year," with a backdrop of demand recovery supported by "containment of COVID-19 in China and stabilizing oil prices."

Through their unlisted wholly government-owned parent companies, Beijing controls 64.4% of CNOOC, 68.3% of Sinopec and more than 80% of PetroChina.

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