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. Last Updated: 07/27/2016

China Oil Shares Skid Over Reserves

SINGAPORE -- Chinese oil companies PetroChina and Sinopec are giving investors a sinking feeling. They are pumping more money into oil production, but their output is not growing.

Sinopec reported disappointing 2003 results Monday after PetroChina offered a weak outlook last week. The earnings reports are exposing the Achilles' heel of China's Big Oil: Fields are aging and there is not enough oil to quench the thirst of the world's second-largest oil market.

Voracious Chinese oil demand lured heavyweight investors last year. U.S. billionaire Warren Buffett held 13.35 percent of PetroChina's Hong Kong-listed shares as of last summer, while U.S. mutual fund Vanguard's Wellington Fund held 4.9 percent of Sinopec's free float last October.

The purchases helped to fuel gains of up to 187 percent in China's three oil issues, which include CNOOC. But this year, oil shares are drifting lower.

"We just sold off all of our energy stocks, including some of the Chinese oil shares. Their results are not encouraging," said a portfolio manager at a Singapore-based fund Monday.

China imports about one third of its demand, so oil companies are looking overseas to boost reserves. But it is tough to buy when oil prices are high and producers cling to their assets.

"Oil assets are not cheap these days, it is extremely hard for a company like PetroChina to find a bargain," said Lawrence Lau, an analyst at Beijing-backed investment bank BOCI.

Total capital expenditure of PetroChina, the country's dominant oil producer, jumped 15 percent to 90 billion yuan ($10.9 billion) in 2003. Sinopec, which derives half of its earnings from exploration and production, booked an 8 percent rise in capex to 45 billion yuan.

All the spending does not translate into more reserves. China Petroleum and Chemical Corp., as Sinopec is officially called, reported a 3.5 percent drop in reserves as it announced a smaller-than-expected 2003 profit of 22 billion yuan Monday.

Sinopec shares, which zoomed up 165 percent last year, have lost 22 percent this year. PetroChina, which gained 187 percent in 2003, has skidded 16 percent. CNOOC is up just 4 percent.

Oil majors BP and Royal Dutch/Shell recently sold off their stakes worth $3.2 billion in PetroChina and Sinopec. Some investors are speculating ExxonMobil may dump its 3.65 percent stake in Sinopec.

The bulls say Chinese oil shares are worth keeping as oil prices are likely to remain high. But some say it's time to sell as valuations are rich, and refining and petrochemical facilities are obsolete.

"They are not cheap if you compare them with global peers. But my gut feeling is that oil prices will stay higher than we think," said James Cheng, managing director at Asia Strategic Investment Management.

Indeed, with Brent oil still above $30 per barrel, profits come easy. PetroChina earned 70 billion yuan in 2003, less than investors expected but still the world's fourth-highest oil company profit.

PetroChina, Sinopec and CNOOC, a pure upstream producer in offshore China that earned 12 billion yuan last year -- are trading at 10.7-12.7 times their forecast earnings, not far from 13.3 times for Shell and 14.3 times for BP.

The trio have one thing in common -- their production is not growing. PetroChina and Sinopec's oil and gas production were virtually flat, while CNOOC's output growth of 2.9 percent was below expectations.

Half of PetroChina's crude output comes from the Daqing oil field in northeast China, where output has been sagging. Sinopec's Shandong-based Shengli oil field, which accounted for most of its crude output, is also getting depleted.