Chinese Oil Companies Move Up on Fortune Global 500

Chinese Oil Companies Move Up on Fortune Global 500

By Tim Daiss and Michael J. Economides

For almost 15 years we have been beating the drum of the importance of the oil business for the world, a far cry from peak oil and the cacophony of climate change nonsense. Chinese demand for oil and gas has provided and continues to provide an additional accent. It is moving towards the domination of the oil business and commerce. Chinese oil companies have obliged and filled a void in that country and they have influenced the oil business in hitherto unthinkable ways. More than $200 billion have been invested by Chinese oil companies to buy oil and gas properties throughout the world.

Sinopec Group moved up a notch from fifth to fourth on this year’s Fortune Global 500, which was released in June. The list of corporations, which are ranked according to yearly revenue, places the Chinese state-owned oil major’s revenue at $428.2 billion. Seven of the top ten slots belong to oil and gas majors and one energy company.

Royal Dutch Shell occupied the first slot, topping out at an impressive $481.7 billion in revenue and profits of $26.6 billion, followed by Wal-Mart ($469.2 billion revenue and $47 billion profit). Another Chinese state-owned oil major reached the top ten. CNPC was ranked at number five, just behind Sinopec, with $408.6 billion in revenue and $18.2 in profit.

China’s other state-owned oil major, Chinese National Offshore Oil Corporation (CNOOC) ranked 93rd with $83.5 billion in revenue and $7.7 billion in profits. However Sinopec is the sweetheart of the three Chinese national oil companies (NOCS), posting a 25 percent increase in first quarter net profits (rare performance for a Chinese NOC), thanks to what the Fortune Global 500 report calls “Sinopec’s extensive marketing and distribution network in China.”

Sinopec said that the increase in quarterly profits were due to development and increase in sales, and optimized production and operation, while analysts attributed the performance to a retail gasoline and diesel price hike and lower crude oil prices, which made the company’s refinery business more profitable but weighed on prospecting and extracting operations.

The company is also aggressively acquiring assets outside of China. This past June, Sinopec bought Marathon Oil’s stake in an Angolan oil and gas field, which should boost its production by 14,000 barrels per day, the Fortune Global 500 report added.

Applause or contempt?

While many in China applauded the news that nearly one hundred Chinese companies made the list, some weren’t so pleased. State-run Xinhua news agency ran a commentary a day after the Fortune Global 500 disclosure, titled “Fortune 500 List Reveals Need for Structural Reform.”

The commentary said the Chinese companies on the list are in industries dominated by state-owned enterprises (SOE) such as steelmaking, power generation, energy and chemicals, therefore the country’s “unbalanced economic structure is evident in the ranking.” It also said this suggests weak profitability for businesses in the “real economy” amid a global downturn and domestic structural woes.

Xu Zhengzhong, an economics professor at the Chinese Academy of Governance told Xinhua China needs to “transition toward high value-added and technology-intensive industries.” He added that resource companies and cheap labor can’t drive economic growth in a sustainable way.

Xinhua also made another valid point. It said that the average debt to equity ratio for non-financial Chinese companies on the list came in at 4.42, much higher than the 2.79 seen in U.S. companies, “a sign that Chinese companies are relying too heavily on borrowed money for business expansion.”

This is true for China’s three NOCs (particularly PetroChina, CNPC’s publically listed arm) that have been accumulating unprecedented amounts of debt to fund overseas mergers and acquisitions in the wake of continued government price controls on fuel products sold domestically.

While China grapples with the merits of SOEs, Sinopec is trying to further its domestic gas distribution network. However the company’s recent natural gas plans did not play out the way it had originally intended.

David and Goliath in corporate China

Last year, Sinopec, which has what the Financial Times calls “an extensive petrol distribution network but lacking urban gas distribution “ tried, along with Chinese gas distributor ENN Holdings, to purchase China Gas Holdings (a private Hong-Kong based firm) for $2.2 billion in China’s first hostile corporate take-over attempt.  China Gas presented a tempting offer for Sinopec since it has a range of natural gas distribution networks in more than 170 mainland cities.

The move also underscored China’s plans to increase its natural gas usage amid concerns over pollution and its efforts to diversify the country’s fuel mix. Analysts said Sinopec’s interest in China Gas came from the expectation that the use of natural gas will boom over the next decade, while an IBISWorld report said that in 2013, revenue for China’s natural gas production and distribution industry is estimated to increase nearly ten percent to $63.9 billion.

Danny Huang, an oil and gas analyst at RBS said at the time that Sinopec already had upstream assets, but needed to buy more downstream assets. The deal would have created China’s largest downstream natural gas distributor, yet it failed. China Gas was able to hold off Sinopec’s overtures –a true David and Goliath story in corporate China.

Yet, the companies did recently reach a contractual agreement for long-term co-operation, including an agreement that China Gas will distribute Sinopec’s gas through its network. Also, a joint venture company will be established to develop the LPG market and urban pipeline gas projects. China Gas’ retail gas sales totals about 1 million tons a year, while Sinopec’s domestic refineries produce about 12 million tons a year.

What about next year?

Will Sinopec move up another notch on the Fortune Global 500 in 2014 and can it have repeat performances of its first quarter surge in profits? Some factors coming into play include recent spikes in global oil prices (due to political turmoil in Egypt, and obvious oil speculators’ price manipulation despite an ample supply of oil worldwide) that will cut into Sinopec’s profits as its refining margins are reduced. However, higher oil prices can help offset this if Sinopec continues to grow its prospecting and extracting activities.

China Gas for its part disclosed on June 26 that it made an 84.9 percent jump in net profit to HK$1.76 billion for the year to March 31, which is more than 20 percent higher than analysts’ expectations.

Michael Economides is Editor-in-Chief of the Energy Tribune