By ANDREW PEAPLE
Just as the first quarter of 2009 could be a nadir for the Chinese economy, so PetroChina will be hoping a 35% drop in first-quarter profit will prove a low point.
But there's less reason to be confident that China's biggest oil refiner is capable of the recovery some predict for the country as a whole.
For sure, fuel demand in China has shown small signs of recovery recently, though the International Energy Agency still expects it to contract this year. It's hardly surprising PetroChina is suffering along with other oil majors, as lower average oil prices bite: The U.K.'s BP saw first-quarter profit dive 59%.
Like BP, PetroChina is looking to cut costs, with oil prices well off of stratospheric heights hit last year. But lack of cost control during the good times could come to haunt PetroChina during a leaner period for the oil sector.
Citi Investment Research says PetroChina spent $35 producing one barrel equivalent of oil last year, up from $14 in 2005.
Those costs could remain high as PetroChina spends more to squeeze out production from its aging oil fields. That's also proving a drain on cash flow. Capital expenditure this year, which includes upkeep of existing oil fields, is predicted to be around the same as last year, about $34 billion, up 27% from 2007.
It's already putting a strain on PetroChina's balance sheet, with borrowing rising fast: $3.6 billion of medium term notes were issued in the first quarter -- boosting the value of outstanding debt by 19% since the end of December.
PetroChina won't have problems raising funds in a crunch, thanks to its government backing. That doesn't mean investors should offer it their own backing, though.
