China oil companies could report ‘significant losses’ in Q1: Bernstein

Earnings from China’s oil firms are going to “look pretty ugly” in the short-term, one Bernstein analyst told CNBC on Monday.

“We’re expecting very significant losses in the first quarter for PetroChina and Sinopec as a result of the low oil prices,” Neil Beveridge, senior oil and gas analyst at Bernstein, told CNBC’s “Street Signs.”

Both PetroChina and Sinopec are expected to post their quarterly earnings later this week, according to Refinitiv.

It comes after recent volatility in oil prices which saw U.S. crude prices go into negative territory for the first time in history. Fears are mounting over slowing demand as a result of the economic fallout from the global coronavirus pandemic.

Beveridge said onshore production in China is on “the high end of the cost curve,” with break-even levels at about $50 to $60 per barrel. In comparison, international benchmark Brent crude futures currently sit at around $20 per barrel.

“The problem with some of the Chinese producers, I’ve heard, is that it’s very difficult, given that these are state-owned enterprises, to cut costs as aggressively as private sector companies,” the Bernstein analyst said. This has led the firms to be slow in their reaction, from cutting costs to reducing capital expenditure, he added.

“As a result, you’ll see very significant losses I think, as they report (first quarter) numbers,” Beveridge said, with the second quarter set to be “even worse.”

Looking ahead, Beveridge said a “source of potential benefit” from the lower oil prices for these firms is in downstream refining for petrochemical businesses.

“Low prices mean lower feedstock costs,” he said. Feedstock refers to raw materials used in industrial processes. “As China gets back to work, we will see a recovery in some of the downstream margins that will offset some of the upstream losses for those companies.”