By Wang Ying and John Duce
March 26 (Bloomberg) -- PetroChina Co., the world’s second- largest company by market value, said it faces “severe challenges” this year after refining losses and a slump in crude oil prices led to its first annual profit drop since 2001.
“Production and operations will be confronted with huge difficulties amid the uncertainties and unexpected risks of the external environment,” Beijing-based PetroChina said in a statement in Hong Kong yesterday. Net income fell 22 percent to 114 billion yuan ($16.7 billion) in 2008, it said.
PetroChina’s losses from processing crude widened fourfold to 83 billion yuan as government curbs on fuel prices prevented it from passing on higher costs to consumers. China’s biggest oil producer and second-largest refiner said it plans to cut output this year because the global financial crisis may further curb economic growth and energy demand.
“Fortunes of the company will depend on oil prices and government policy in the near term,” said Larry Grace, an independent energy analyst based in Hong Kong.
Fourth-quarter profit dropped 39 percent to 20.9 billion yuan from a year earlier, according to Bloomberg calculations made by subtracting earnings for the first nine months from full-year figures released yesterday. A PetroChina spokesman declined to confirm the derived figure.
PetroChina joins BP Plc and Royal Dutch Shell Plc in reporting lower earnings after crude ended the year 70 percent lower than a record in July. While crude oil futures in New York have gained 19 percent this year, prices are 48 percent lower than a year earlier.
‘Slowdown Continues’
PetroChina’s shares have declined 34 percent in a year in Hong Kong, compared with a 39 percent drop in the Hang Seng Index. Exxon Mobil Corp, the world’s most valuable company, has fallen 19 percent in the same period.
China’s economy expanded 6.8 percent in the fourth quarter, the weakest pace in seven years. Growth for the full year was 9 percent, down from 13 percent in 2007.
“The economic slowdown still continues,” PetroChina President Zhou Jiping said in Hong Kong yesterday. “It will take more time to see a rebound. That applies to both the global and Chinese economies.”
PetroChina said it plans to cut oil production by 4.4 percent to 833 million barrels this year and crude processing may decline 1.4 percent.
Profit this year will be “worse” than 2008, Chairman Jiang Jiemin said on March 5 in Beijing. Net income may fall 24 percent this year to 87 billion yuan, according to the median of 22 analysts’ estimates compiled by Bloomberg.
Fuel Pricing
China’s revised fuel pricing system that took effect in December may help to partly offset weaker demand.
Gasoline and diesel prices will be adjusted when global crude-oil costs change by more than 4 percent over 22 straight working days, and Chinese refiners will be allowed a profit margin of at least 5 percent, Zhou said.
The government in December replaced a guidance band for retail fuel prices with a market-based ceiling that includes the cost of crude oil, taxes and an “appropriate profit” for refiners.
China raised fuel prices by as much as 5 percent from yesterday to reflect the gain in global oil prices this year. The increase will boost PetroChina’s monthly revenue by 1.26 billion yuan, President Zhou said.
The country had slashed fuel prices in January after crude fell more than $100 a barrel from its peak.
“The pricing mechanism will benefit PetroChina,” said Grace Liu, an analyst at Guotai Junan Securities based in Shenzhen. “The company can be sure to make a profit in refining from this year.”
Windfall Tax
PetroChina will also pay a lower windfall tax this year, Liu said. Chinese oil producers pay a tax on revenue from crude sold above $40 a barrel under a levy introduced in March 2006.
Windfall tax payments rose 91 percent to 85.29 billion yuan last year, according to President Zhou.
Capital expenditure rose 27 percent to 232.2 billion yuan last year and will be little changed at 233.2 billion yuan in 2009, PetroChina said. Exploration and production spending will be cut by 15 percent to 133.8 billion yuan, while expenditure on refining operations will rise 36 percent to 27.5 billion yuan.
“The refining business will be a major contributor to our profits this year and in the future,” Zhou said.
The company will also take advantage of low oil prices to expand overseas, Zhou said. PetroChina will “improve cooperation” with Russia, Venezuela, Iraq and Qatar, he said without elaborating.
Acquisitions
Chairman Jiang said last year PetroChina plans to buy energy companies made vulnerable by the global credit crisis. China’s state-owned firms announced plans in February to invest $22 billion in mining companies, securing iron ore, copper and zinc assets from debt-laden entities unable to secure funding amid the global recession.
Chinese companies are boosting acquisitions overseas to take advantage of low commodity prices. According to the nation’s energy plan for the three years ending 2011, the government may tap its $1.95 trillion foreign exchange reserves and set up an oil fund to help companies expand abroad, China National Petroleum Corp. said last month.
Eighteen out of 23 analysts have a “buy” or “hold” rating on PetroChina’s shares, according to recommendations compiled by Bloomberg. The stock is among the top holdings of Mark Mobius’s Templeton Emerging Markets Trust.
PetroChina almost tripled on its first day of trading in Shanghai on Nov. 5, 2007, becoming the world’s first company to be valued at $1 trillion. The oil producer and refiner was valued at $297 billion on March 24, behind Exxon at $343 billion.
To contact the reporters on this story: Wang Ying in Hong Kongt . ywang@bloomberg.net; John Duce in Hong Kongt . yduce1@bloomberg.net
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