Sinopec, PetroChina Improve Operating Cash Flow Performance, Performance Correlates with Oil Prices in Inverted "U" Shape

Soochow released a research report stating that PetroChina (00857) and Sinopec (00386) have stable overall gross profit margins, while CNOOC (00883) has seen an increasing trend in gross profit margin over the past three years. In the upstream business, PetroChina and Sinopec have relatively stable crude oil production, while CNOOC has seen an increase in crude oil production; the natural gas production of the three oil companies has been steadily increasing. In terms of financial comparison, PetroChina and Sinopec's performance is inversely related to oil prices, with the best profitability around Brent crude prices of $100/barrel and $80/barrel respectively, while CNOOC's profitability is nearly positively correlated with oil prices. With the State-owned Assets Supervision and Administration Commission (SASAC) paying more attention to the cash flow assessment of central enterprises, the operating cash flow of the three oil companies is expected to improve by 2023. Analysis and comparison of the business of the three oil companies: 1) Operating income: Half of PetroChina's operating income comes from oil and gas sales, while Sinopec's operating income is relatively balanced and stable. CNOOC's operating income is primarily from crude oil sales. 2) Gross profit margin: PetroChina and Sinopec have stable overall gross profit margins, while CNOOC's gross profit margin has shown an increasing trend in the past three years. 3) Upstream business situation: PetroChina and Sinopec have relatively stable crude oil production, while CNOOC's crude oil production has increased; the natural gas production of the three oil companies is steadily increasing. In 2023, the reserves-to-production ratio of CNOOC, PetroChina, and Sinopec are 10, 11, and 7 years respectively. 4) Downstream business situation: Sinopec has a large scale of crude oil processing, currently maintained at 200-250 million tons/year, while PetroChina's crude oil processing volume is also on the rise; the main products of PetroChina and Sinopec are diesel and gasoline, with kerosene production being the lowest. CNOOC does not have refining operations within the listed company, as the refining operations are within the CNOOC Group. 5) Terminal business situation: Sinopec and PetroChina have the largest number of gas stations in China, with significant scale advantages. CNOOC does not have gas station operations within the listed company, as these operations are within the CNOOC Group. Financial analysis and comparison of the three oil companies: 1) Relationship between oil prices and performance: The performance of PetroChina and Sinopec is inversely related to oil prices, with the best profitability around Brent crude prices of $100/barrel and $80/barrel respectively, while CNOOC's profitability is nearly positively correlated with oil prices. 2) Financial ratios: The ROE levels of the three oil companies have generally increased over the past two years, while the asset-liability ratio has remained stable. 3) Cash flow levels: With SASAC paying more attention to the cash flow assessment of central enterprises, the operating cash flow of the three oil companies is expected to improve by 2023. 4) Capital expenditures: PetroChina has the highest capital expenditures, followed by Sinopec and CNOOC. 5) Percentage of capital investment in business: PetroChina has a high proportion of investment in exploration and production, Sinopec's investments are relatively balanced across various businesses, while CNOOC invests all capital in upstream exploration and production, with development having the highest proportion. Investment recommendation: The three oil companies are leading oil and gas companies in China, with large oil and gas reserves and outstanding exploration, development, refining, and sales capabilities. They have significant resource and scale advantages, and strong risk resistance capabilities. It is recommended to pay close attention to CNOOC Limited/CNOOC (600938.SH/0883.HK), PetroChina/PETROCHINA (601857.SH/0857.HK), and China Petroleum & Chemical Corporation/SINOPEC CORP (600028.SH/0386.HK). Risk warning: Geopolitical risks; macroeconomic fluctuations; slower-than-expected recovery in demand for refined oil products.