Thin domestic margins and expensive overseas acquisitions may hurt China’s biggest O&G producer’s balance sheet.
As state-owned enterprises, China’s national oil companies’ (NOCs) hierarchy of needs are: appease policy makers in Beijing, secure oil and gas and generate profit. Unfortunately for NOCs like PetroChina, this hierarchy seriously curbs profits and forces the company to raise debt to fund acquisitions, casting a shadow over its financial future.
According to a new report from OilPrice.com, China’s NOCs have collectively spent over $200bn on foreign acquisitions over the past eight years. A separate report from the China University of Petroleum, published in 2011, suggested that up to two thirds of these investments were loss-making.
Despite its limited scope to generate cash quickly, PetroChina has announced plans to spend yet another $7bn on overseas M&As in the next six months alone.
In order to fund these purchases, the oil giant has been raising billions of dollars from global bond markets, significantly reducing supply to rural provinces and is now planning to sell of minority stakes in domestic oil and gas fields and pipeline projects.
Such heavy borrowing has exerted significant downward pressure on the company’s stock price, as investors begin to question its reliance on debt. In 2007, PetroChina’s debt-to-capital ratio was a healthy 10%, but by this March it had grown to 47% and could grow to 50% by as early as 2015. Cash flow from operating activities, another key metric of financial health, has also dropped three years in a row.
Using debt to finance rapid expansion is not unhealthy if the company intends to generate a profit in the near future. However, if the ratio of loss-making acquisitions remains high, while domestic profits continue to fall, investors will lose confidence and PetroChina will no longer be able to borrow the cash it needs to sustain its operations.
A bailout for the worlds sixth biggest company by revenue would be a costly and unpleasant affair.