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1. INTRODUCTION 1.1 TOPIC CHOSEN AND ITS CONTEXT: Topic chosen: An analysis of the financial situation of China National Petroleum Corporation (CNPC) Context of the topic: This report analyses the financial situation of China National Petroleum Corporation (hereafter referred to as CNPC), which is the largest integrated oil and gas company in China. Originally, CNPC was a government department in the early days of the People's Republic of China and was finally created in 1988 when the government decided to disband the Ministry of Petroleum and created a state owned company to handle all Petroleum activities in China.1993 marked the beginning of CNPC international operation when CNPC signed a service contract with the government of Peru, now it has 30 international exploration and production projects with operations in Canada, Sudan, Thailand etc. Further in 1998, the company was restructured by the government in accordance with the upstream and downstream principle of oil industry. In 1999, CNPC injected most of its domestic assets into PetroChina, a subsidiary of CNPC. As the controlling shareholder of the Company, CNPC is independent from the PetroChina in all aspects, including personnel deployment, assets, financial and business operations. On 5 November 2007, CNPC was listed as A share1 in the Shanghai Stock Exchange.2 The operations of CNPC belong to the petroleum industry, which was established in the 8th century, when the streets of Baghdad were paved with tar, derived from petroleum through destructive distillation. In the 9th century, oil fields were exploited in the area around Baku, Azerbaijan. And in the same century, petroleum was distilled, producing chemicals such as Kerosene. The Industry Revolution generated an increasing need for energy, as a result of this, it was discovered that Kerosene could be extracted from crude oil and used as a light and heating fuel. By the 20th century, petroleum has become the most valuable commodity traded on the world market. Now, petroleum is vital to nearly all other industries and thus is critical concern to many nations. Discovering new sources of petroleum ahead of the competition is one of the key ways to staying successful in the petroleum industry. The petroleum industry can be divided into two broad groups: upstream producers (exploration, development and production of crude oil or natural gas) and downstream transporters (tanker, Pipeline transport, refiners, retailers, and consumers).3 CNPC is an integrated oil company so its operations cover both of the upstream and downstream.
1.2 REASONS FOR CHOOSING THE TOPIC 1
A shares on the Shanghai and Shenzhen stock exchanges refers to those that are traded in Yuan, the currency in mainland China. Some shares on the two mainland Chinese stock exchanges, known as B shares, are traded in foreign currencies. 2 History of CNPC Available from: http://en.wikipedia.org/wiki/CNPC（accessed at 2 March 2008） 3 Petroleum industry Available from: http://en.wikipedia.org/wiki/Petroleum_industry (accessed at 2 March 2008) 2
The reasons why the author chose to analyze the financial situation of CNPC were as follows: 1.2.1 The world’s crude oil price has increased continuously in recent years. Crude oil price hit a record of $105.10 a barrel on 6 March 2008, which broke the previous inflation-adjusted price record of $103.76, set in 1980 during the Iran hostage crisis (NYMEX Crude Oil Price).The author is very interested in how the growth of crude oil price will influence the financial performance and further development of CNPC. 1.2.2 CNPC is seeking its international role. As China’s largest oil and gas producer and supplier, CNPC not only secured its domestic market, but with increasing investment and engagement in overseas markets, CNPC’S international operations are expanding both in scope and scale. In August 2005 it was announced that CNPC agreed to buy PetroKazakhstan for US$4.18 billion. This would be the largest overseas acquisition by a Chinese company. The acquisition was successfully completed 26 October 2005 after a Canadian court turned down an attempt by LUKoil to block the sale. 1 The author would like to find out how competitive CNPC is on the global market. 1.2.3 The demand-supply imbalance in oil. As petroleum is a non-renewable natural resource the industry is faced with an inevitable eventual depletion of its supply. Oil exploration alone will not prevent future shortages of the resource. Economists argue that dramatic increase in oil price will spur further exploration and development of oil. However, this process will not increase the amount of oil in the ground, but will rather temporarily prolong production as higher prices to make it economical to extract oil that was previously not economically recoverable.
"It's no secret anymore that for every nine barrels of oil we consume, we are only discovering one."(The BP Statistical Review of World Energy) “The world is addicted to oil. In just 8 years, it's projected the world will be consuming nearly 50,000 gallons of oil every second.”2 As for the above reasons, the conflict between the oil consumption and oil production is a big issue. The author has a great interest in how this will have an effect on CNPC.
1.3 AIMS AND OBJECTIVES OF THE REPORT This report is aimed to assess the financial situation of CNPC based on secondary data 1
CNPC secures PetroKazakhstan bid. BBC news, Available from: http://news.bbc.co.uk/2/hi/business/4378298.stm (accessed at 3 March 2008) 2 The truth on peak oil Available from http://www.energyandcapital.com/subscribe/1944?gclid=COC4sfnJJECFQxcQgod8hcLxA(accessed at 11 March 2008) 3
derived from its annual reports in the period 2002-2006 and compare it to its major rival China Petroleum & Chemical Corporation (hereafter referred to as SINOPEC) in China. The main objectives of this report are: 1. 2. 3. 4. 5.
To find out whether CNPC is successful and competitive in the petroleum industry. To find out whether the company is capable in managing its assets to generate sales revenue or sales income. To show whether CNPC is efficient in managing its working capital. To identify CNPC’s strengths, weakness, opportunities and threats in order to find ways to improve its performance. To show its potential for sustained development.
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2. INFORMATION GATHERING 2.1 SOURCES USED AND REASONS 2.1.1 Annual reports of CNPC and SINOPEC (2002-2006). These annual reports have been used as the main sources of data and information. They provide detailed annual results on assets, liabilities, operating costs, management expense, taxes, investments, minority equity, owner equity etc from the management of the company who run the business. The data and information over a continuous period of 5 years has been utilized to extract various operational and financial measures. 2.1.2 Analysts’ evaluation reports of CNPC and SINOPEC. These reports provide profound professional opinions on CNPC and SINOPEC in aspects of current financial situations, problems in corporation governance and future prospects from the viewpoints of experts. 2.1.3 Newspapers and Journals. News on newspapers such as Financial Times provides up to date and reliable information about CNPC and SINOPEC. Along with comments of specialists, articles published in journals such as The Oil & Gas Journal contribute a lot to the analysis of these companies. 2.2 METHODS USED TO COLLECT INFORMATION 2.2.1 WEBSITES VISITED The internet plays a great role in the process of information collection. The author has visited various websites frequently as they provide with unlimited source of data and information. The websites visited including the websites of CNPC1 and SINOPEC2, The Financial Times3, the CPCIA4, the NYMEX5 and the Shanghai Stock Exchanges etc6 etc. 2.2.2 LIBRARY RESEACH Besides accessing to the internet, the author uses library resources for background reading such as the history of energy market, the research methods used in business analysis etc. Libraries used for general reading includes: the Imperial College Library, Southfields Library, Shanghai Library.
1
CNPC’s website (http://www.cnpc.com.cn/eng/ ) SINOPEC’s website (http://english.sinopec.com/index.jsp) 3 The Financial Times’ website (http://www.ft.com/home/uk) 4 The CPCIA’s website (http://www.cpcia.org.cn/english/english.htm) 5 The NYMEX’s website (http://www.nymex.com/index.aspx) 6 The Shanghai Stock Exchange’s website (http://www.sse.com.cn/sseportal/en_us/ps/home.shtml) 2
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3. ANALYSIS The analysis is made from stakeholders’ points of view, using both quantitative and qualitative analysis methods, based on the business and financial performance of CNPC in the period 2002-2006 and comparing it to its major rival SINOPEC which is the second largest crude oil producer in China. Both the Stakeholders and the Company’s perspective will be taken into account to do so. CNPC's core business is composed of three sectors: The upstream sector includes the exploration, development and production of crude oil and natural gas; The midstream sector is composed of the construction of pipeline, storage and transportation facilities, natural gas marketing and NGLs projects (natural gas liquids such as ethane, propane and butane); The downstream sector consists of refining and marketing of crude oil and natural gas, trading of crude oil and oil products. 3.1 BUSINESS PERFORMANCE RESULTS The main activities of the petroleum industry are exploration, production, refining and marketing. To start with, the author compared operation results of CNPC including exploration and production of crude oil & natural gas, refining and marketing of refined products & petrochemicals between years from 2002 to 2006 (data is obtained from CNPC Annual report 2006, page 6-8). CNPC uses million metric tons as the unit of its crude oil, the author converted it into million barrels using the formula of 1 metric tonne equals to 7.33 barrels.1 3.1.1 Exploration of crude oil and natural gas Oil and gas exploration is the search by petroleum geologists for hydrocarbon deposits beneath the Earth's surface2. The more resources discovered and retained, more solid the foundation will be in the future growth of the company. ·Newly proven oil and gas in place Oil in place is the total hydrocarbon content of an oil reservoir, which refers to the oil in place before the commencement of production. Natural gas is a gaseous fossil fuel, which is found in oil fields (associated) either dissolved or isolated in natural gas fields (from Wikipedia).The amount of newly proven oil in place rose significantly from 4003.55 million barrels in 2002 to 6627.2 million barrels in 2006, an increase of 66% over the 5-year period. In 2002, the figure of newly proven gas in place was 335.23 billion cubic meters (hereafter referred to as bcm), while in 2006 the figure had increased by 10% to 369.25 bcm (diagram 1). CNPC's exploration activities yielded a significant increase in newly discovered oil and gas resources during the period. The success in exploration was due largely to its technology innovation applied in the area as mentioned in its annual reports. Thanks to the quality of seismic data from complex mountainous regions and DMBS (depth-migration before stack ), significant reserves are discovered with the successful exploration of a number of 1
Average energy conversion factors Available from: http://www.lngplants.com/conversiontables.htm (accessed at 5 March 2008) 2 The definition is taken from Wikipedia’s website (http://en.wikipedia.org/wiki/Main_Page) 6
basins (CNPC Annual report 2006,page 17). Diagram 1 CNPC’s newly proven oil and gas in place (2002-2006)
8000.00 7000.00 6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00
500.00 400.00 300.00 200.00
bcm
million barrels
Oil & gas in place
100.00 0.00 2002
2003
2004
2005
2006
CNPC Newly proven oil in place(mmbbls) CNPC Newly proven gas in place(bcm)
·Remaining recoverable oil and gas reserves Oil and gas reserves refer to portions of oil and gas in place that are claimed to be recoverable under current economic constraints (from Wikipedia).The remaining recoverable oil reserves rose by 28% from 15.47 billion barrels in 2002 to 19.80 billion barrels in 2006 and there was a 42% growth in remaining recoverable gas reserves, from 1,558.10 bcm in 2002 to 2,215.90 bcm in 2006 (diagram 2). The oil reserves depend on the actual amount of oil in the ground as well as the price of the oil on the market. That’s to say, a large change in price will radically change the amount of oil understood to be part of the reserve, regardless of whether any oil has been lifted from the wells or not.1 So on one hand, the increases in oil and gas reserves were owing to the achievements in exploration. On the other hand, it was partly due to the upward trend in crude oil price during the period as witnessed by the crude oil price movements 1994-2007. (APPRENDIX B).
Diagram 2 CNPC’s remaining recoverable oil and gas reserves (2002-2006) 1
Oil reserves Available from: http://en.wikipedia.org/wiki/Oil_reserves (accessed at 6 March 2008) 7
25.00
2,500.00
20.00
2,000.00
15.00
1,500.00
10.00
1,000.00
5.00
500.00
0.00
0.00 2002
2003
2004
2005
bcm
billion barrels
Oil & gas reserves
2006
CNPC Remaining recoverable oil reserves(billion barrels) CNPC Remaining recoverable gas reserves(bcm)
3.1.2 Production of crude oil and natural gas CNPC achieved a modest increase in crude oil production of 18% from 836.36 million barrels in 2002 to 990.12 million barrels in 2006. As to the natural gas production, there was a sharp upward movement in it, with a rise of 106% from 23.3 bcm in 2002 to 48.01 bcm in 2006 (diagram 3). The most common method of obtaining petroleum is extracting it from oil wells found in oil fields. So the extraction efficiency determines the production ability of a petroleum company. The boom in production was attributed to the applying of EOR and horizontal drilling in the extraction process (CNPC Annual report2006, page 7). EOR, Enhanced oil recovery is a generic term for techniques for increasing the amount of oil that can be extracted from an oil field. Using EOR, 30-60%, or more, of the reservoir’s original oil can be extracted compared with 20-40% using primary and secondary recovery (from Wikipedia). Diagram 3 CNPC’s production of crude oil and natural gas (2002-2006) Oil & gas production CNPC Crude oil production(mmbbls)
1050
60
1000
50
950
40
900
30
850
20
800
10
750
0 2002
2003
2004
2005
bcm
million barrels
CNPC Natural gas production(bcm)
2006
3.1.3 Refining and marketing of refined products, petrochemical products CNPC’s downstream operation can be divided into two major groups: 1) the oil refining 8
and marketing of refined products such as gasoline, diesel and paraffin etc ; 2) the production of petrochemicals, e.g. ethylene, the synthetic fiber etc. In the period, there was a steady increase of 45% in the output of refined products, from 54.44 million metric tons (hereafter referred to as mmt) in 2002 to 78.69 mmt in 2006. The refined products sales followed the same upward trend as the refined products output, climbed by 37%, from 56.73 mmt to 77.67 mmt. Considering the performances achieved in refining and marketing, it was relatively poor in the production of petrochemicals, with a 21% increase from 11.61 mmt to 14.05 mmt (diagram 4). The rising sales were due largely to its extended market network. “By the end of 2006, CNPC owned 18,207 service stations.” (CNPC Annual Report, 2006, page 36). Diagram 4 CNPC’s downstream operation results (2002-2006) Downstream Operation 80 70 60 50 mmt 40 30 20 10 0
Refined products output Refined products sales petrochemicals output 2002 2003 2004 2005 2006
3.2 FINANCIAL PERFORMANCE RESULTS Next, the author compared CNPC’s financial performance with that of SINOPEC by selecting and calculating some specific financial ratios which were categorized into four groups, the profitability ratios, liquidity ratios, debt ratios and market ratios (data is derived from consolidated balance sheet & consolidated profit statement of CNPC and SINOPEC). 3.2.1 Profitability ratios Profitability ratios measure the company’s use of its assets and control of its expenses to generate an acceptable rate of return (from wikipedia). Ⅰ. Income from core business and gross profit margin Income from core business represents revenue from sales of crude oil, natural gas, refined products and petrochemicals. The figures of both CNPC and SINOPEC rose dramatically in the period 2002-2006. CNPC’s total amount increased by 121% from ￥379.19 billion in 2002 to ￥893.65 billion in 2006. At the same period, SINOPEC’s gross income tripled from ￥ 324.18 billion in 2002 to ￥ 1044.58 billion in 2006 9
(diagram 5).Gross profit margin is expressed as gross profit (income from core business less cost of sales)divided by income from core business. Larger gross margins are generally good for companies, CNPC’s, with an average of 37.17%, was higher than that of SINOPEC, averaged at 19.89% (diagram 6). Diagram 5 Income from core business of CNPC and SINOPEC (2002-2006) Income from core business 1,200 1,000 800 billion 600 yuan(RMB) 400 200 0
CNPC SINOPEC 20022003200420052006
Diagram 6 Gross profit margin of CNPC and SINOPEC (2002-2006) 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2002
2003
CNPC Gross profit margin
2004
2005
2006
SINOPEC Gross profit margin
Ⅱ.Operating profit and profit margin Operating profit is calculated by gross profit less operating expenses. It is a measurement of the money a company generated from its own operations and can be used to gauge the general health of the core business. Operating profit margin (operating profit divided by turnover), is a measurement of management’s efficiency. It can be used in comparing the quality of a company’s operations to its competitors. A business that has a higher operating margin than its rival tends to have lower fixed costs 10
and a better gross margin. CNPC’s operating profit surged from ￥61.6 billion in 2002 to ￥189.9 billion in 2006. While to SINOPEC, it also rose noticeably from ￥ 22.8 billion in 2002 to ￥ 71.3 billion in 2006, although fell slightly to ￥56.8 billion in 2005 (diagram 7).
bi l l i on yuan( RMB)
Diagram 7 Operating profit of CNPC and SINOPEC (2002-2006)
200. 0 180. 0 160. 0 140. 0 120. 0 100. 0 80. 0 60. 0 40. 0 20. 0 0. 0
SI NOPEC operat i ng prof i t CNPC operat i ng prof i t
2002 2003 2004 2005 2006
The operating profit margin of CNPC grew gently from 16.25% in 2002 to 26.37% in 2005 but decreased to 21.26% in 2006. There was a slight increase in the operating profit margin of SINOPEC, from 7.04% in 2002 to 10.66% in 2004. It dropped to 7.11% in 2005 and reached the bottom at 6.83% in 2006 (table 1). Table 1 Operating profit margin of CNPC and SINOPEC (2002-2006) Year CNPC SINOPEC
2002 16.25% 7.04%
2003 17.29% 8.51%
2004 24.54% 10.66%
2005 26.37% 7.11%
2006 21.26% 6.83%
The operating expense and management expense of CNPC in 2006 went up by 23.9% and 95.7% respectively compared to those in 2005. On the other hand, financial expense went down by 13%. Higher expenses reduced partly the operating profit margin of CNPC in 2006 (diagram 8).
Diagram 8 Expense of CNPC (2002-2006)
11
Expense(million yuan)
CNPC Expense
100,000.00 operating expense
80,000.00 60,000.00
management expense financial expense
40,000.00 20,000.00 0.00 2002
2003
2004
2005
2006
Ⅲ.Asset turnover Asset turnover is a financial ratio that measures the efficiency of a company’s use of its assets in generating sales revenue or sales income to the company.(Bodie et al.2004). There was a subtle increase in the asset turnover of CNPC, from ￥ 0.52 in 2002 to ￥ 0.64 in 2006. However, SINOPEC’s asset turnover doubled at the same period, from￥ 0.88 to ￥1.76 (diagram 9). Diagram 9 Asset turnover of CNPC and SINOPEC (2002-2006) Asset Turnover ￥3. 00 ￥2. 50 ￥2. 00
SI NOPEC Asset t urnover CNPC Asset t urnover
￥1. 50 ￥1. 00 ￥0. 50 ￥0. 00 2002 2003 2004 2005 2006
Ⅳ .Profit after tax(PAT) PAT is the net profit earned by the company after deducting all expenses such as interest, depreciation and tax. PAT can be fully retained by a company to be used in the business. PAT of CNPC was booming from ￥23.5 billion in 2002 to ￥106.1 billion in 12
2005 and slightly declined to ￥105.7 billion in 2006. The PAT of CNPC was always higher than that of SINOPEC, with an average of ￥31,130 million (diagram 10). Diagram 10 PAT of CNPC and SINOPEC (2002-2006) Pr of i t Af t er Tax
120, 000 100, 000 80, 000 PAT( RMB Mi l l i on)
CNPC SI NOPEC
60, 000 40, 000 20, 000 0
2002
2003
2004
2005
2006
Ⅴ .Return on capital employed(ROCE) ROCE represents the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between businesses. ROCE of CNPC had an upward trend from 9.19% in 2002 to 19.52% in 2005, but declined to 18.04% in 2006. While the ROCE of SINOPEC increased continuously from 8.17% in 2002 to 18.94% in 2006 (diagram 11). Diagram 11 ROCE of CNPC and SINOPEC (2002-2006) Ret ur n On Capi t al Empl oyed 25. 00%
ROCE( %)
20. 00%
15. 00% CNPC ROCE SI NOPEC ROCE 10. 00%
5. 00%
0. 00% 2002
2003
2004
2005
13
2006
The operating profit of CNPC surged to ￥189.9 billion in 2006 (see diagram 7), so the ROCE decrease of CNPC in 2006 was due to the larger capital employed as witnessed by diagram 12. Diagram 12 CNPC capital employed (2002-2006) CNPC Capital Employed
1,200,000 1,000,000 RMB:
800,000
million
600,000 400,000
CNPC Capital Employed
200,000 0 2002 2003 2004 2005 2006
3.2.2 Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. Ⅰ.Current ratio The current ratio gauges whether or not a firm has enough resources to pay its debts over the next 12 months. CNPC’s average current ratio in the period 2002-2006 was 1.39 which was quite good compared with the average of 0.84 in the petroleum industry1and was far higher than that of SINOPEC, with an average of 0.80 (diagram 13). Diagram 13 Current ratio of CNPC and SINOPEC (2002-2006)
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Petroleum refineries (including integrated) Corp Average Financial Ratios Available from: http://www.bizstats.com/reports/corp.asp? industry=Petroleum+refineries+including+integrated&profType=ratios&var=&coding=32.4.110 (accessed at 18 March,2008). 14
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
1.64 1.31
1.40
1.38
1.20
0.85 0.80 0.81 0.85
0.68
CNPC Current ratio SINOPEC current ratio
2002 2003 2004 2005 2006 3.2.3 Debt ratios Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial gearing, which is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Ⅰ.Debt-to-worth ratio It measures the financial leverage of a company. This ratio is defined as total liabilities divided by net worth (total assets minus total liabilities). Low debt-to-worth ratio represents minimal risk for both the lender and business. As is revealed in the diagram 14, CNPC has an average ratio of 0.48 over the period, which is highly safer compared with the industry standard of 1.73. While the average figure of the SINOPEC’s over the 5-year period is 1.27. Diagram 14 Debt-to-worth ratio of CNPC and SINOPEC (2002-2006) debt - t o- wort h rat i o 1. 40
1. 27
1. 23
1. 20
1. 30
1. 28
1. 25
1. 00 0. 80 0. 60
0. 48
0. 53
0. 40
0. 44
0. 45
0. 49
0. 20 0. 00 2002
2003
2004
2005
2006
3.2.4 Market ratios 15
CNPC debt wort h rat i o SI NOPEC debt wort h rat i o
Market ratios measure investor response to owning a company's stock. CNPC has been listed in the Shanghai Stock Exchange for just five months, so the author focused on the share price movements for discussion. The author selected the share price at the middle of each month from November 2007 to March 2008 to create the share price movements (diagram 15). The opening share price was ￥ 48.6 and it declined by 52.7%, reaching at ￥22.97 in Mar 2008. The falling share price of CNPC didn’t agree with its ascending financial performance results. The possible reasons are 1) The overall stock market in China was falling in the period; For example, the share price of SINOPEC fell by 54.4%, from￥29.31 to ￥13.37 in the same period. The Shanghai composite is down 18 per cent this year and nearly a third from last year’s high. (Dyer, 2008) 2) China’s stock market isn’t fully mature. Shanghai Stock Exchange was reestablished in 1990 1and has some weakness such as lacking of transparency, not totally market-oriented etc. Diagram 15 CNPC’s share price movements (Nov 2007-Mar 2008) CNPC's share price movements 60 50
48.6
40 31.12
30
CNPC
27.88
24.61
20
22.97
10 0 Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
3.3 ATTRACTIONS FROM THE STAKEHOLDERS’ POINTS OF VIEW 3.3.1 Fortune global 500 ranking CNPC’s global ranking improves every year from 81st in 2002 to 24th in 20072 which significantly boost stakeholders’ confidence. 3.3.2 Employee Ⅰ.Employee health CNPC has set up and dispatched 20 occupational health teams to supply medical inspection to the staff for three consecutive years. In 2006, 219,000 employees in special positions received health check, reaching a rate of 95.5%. 1
Shanghai stock exchange Available from: http://en.wikipedia.org/wiki/Shanghai_Stock_Exchange (accessed at 18 March 2008). 2 Available from:http://money.cnn.com/magazines/fortune/global500/2007/ (accessed at 6 March 2008) 16
Ⅱ. Employee safety In 2006, CNPC invested heavily to potential safety and environmental hazards control, 41 sets of chemical facilities with serious potential hazards were shut down.The number of accidents, casualties and economic losses were reduced by 6.3%, 4.1% and 47.8% respectively compared to 2005. Ⅲ.Career development In 2006, CNPC spent RMB 900 million in training 760,000 employees and building four teams, namely the management team, the technical team, the operational team and the international team.
3.3.3 Public Ⅰ.Environment By 2006, CNPC’s 135 subsidiary companies got ISO14001 Certification1 or obtained environmental labeling. Also, in terms of clean production, CNPC attached considerable importance to on-site environmental production, the discharge of oilrelated pollutants were reduced by 4.6% compared to 2005. Ⅱ.Public welfare CNPC actively participates in disaster relief, donations to education and act as a sponsor for cultural and sports events for public interest. For example, CNPC donated ￥10 million to China disabled person’s Federation in 2006. CNPC also participated in Green Corridor in desert and Green Carbon Fund. Ⅲ. Conservation-minded enterprise Though CNPC is a resource-excavating company, it attached great importance to resource conservation. For example, CNPC used resources comprehensively by recycling and utilizing emitted energy, wastewater and coal ash etc. Through these efforts, 1.5 million metric tons of coal and 70 million cubic meters of water were saved in 2006.
1
ISO 14001 was first published as a standard in 1996 and it specifies the requirements for an organisation's environmental management system. It applies to those environmental aspects over which an organisation has control and where it can be expected to have an influence. 17
4．SWOT ANALYSIS 4.1 STRENGTHS 4.1.1 Maintaining supply to customers and its own operation CNPC’s supply and marketing function has an excellent record of keeping products flowing to customers and its own operations, which is an essential skill for an integrated oil & gas company. From 2002 to 2006, CNPC continued the reconstruction of its old oil & gas pipeline network and the new construction of oil & gas pipeline network and storing backups to satisfy peak consumption. As a result, it now has established a vast network of oil and gas pipelines covering China. By the end of 2006, its oil and gas pipeline totaled 35,264 km in length, including 9,816 km for crude oil, 4,311 km for oil products, and 21,137 km for natural gas. 4.1.2 Emphasis on the improvement of technology During the period, CNPC concentrated on the improvement of its technology developing capability, obtaining a number of achievements. It acquired 700 patents out of its 1,221 applications. In 2006, Chinese Academy of sciences (CAS) became CNPC’s long term partner in fields of developing new exploration theories and methods, HiTech R&D and application. So the technology innovation in exploration and production will speed up and sustain the future growth of the company. 4.2 WEAKNESSES 4.2.1 CNPC is mainly state-owned Control remained with the state even though CNPC was listed on Shanghai stock exchange from November 2007. (Appendix A) The price of such stocks of listed companies cannot work as a market-based incentive and restriction for outside investors and the management team so that there is no common basis of interest in corporate governance. This is a special problem coming into consideration of CNPC to be publicly listed on the stock exchange. 4.2.2 Lack of global reach The dramatic rising of energy prices results in intense levels of competition for access to new resources. CNPC is relatively lacking in global reach compared to ExxonMobil, BP etc. In order to sustain its long-term development, CNPC must be competent to discover new oil and gas fields and persist with reserves replacement. But the challenge of exploiting new resources is growing due to increasing competition for access to opportunities globally. CNPC must invest more capital in exploration so as to enhance its portfolio. According to the McKinsey consultants’ estimates, Chinese national oil companies pay at least 10 times more than their international rivals for foreign reserves.1
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Viewpoint: China’s energy gamble .Bloomberg News Available from: http://www.china-alberta.com/? m=200607 (accessed at 12 March 2008) 18
“When you compare CNPC with BP, Royal Dutch Shell and ExxonMobil, it is nowhere near in size, revenue or assets. CNPC is not globally competitive.” A senior Stated-owned Assets Supervision Commission (SASAC) official said. (Teo,2004) 4.3 OPPORTUNITIES The trading environment of CNPC will be strong in the future. First, the Company will have fabulous market opportunities brought by the rapid development of China’s economy. China's booming economy, with 9% growth, requires massive natural resources to sustain its growth. China became a net importer of oil in 1993. By 2045, China will depend on imported oil for 45% of its energy needs. (Engdahl, 2006) Second, Oil price will remain high for the foreseeable future driven by continued oil demand growth and low surplus oil supply capability. CNPC ’s income from core business will be further benefited from the soaring crude oil price. Third, the well growing background of CNPC and its leading market position as the largest oil & gas producer and supplier in China will ensure its future growth. Competitive advantage rests with companies that have well-established positions, allowing them to exploit technology and economies of scale to the maximum extent. (BP Annual report 2006, page 19) 4.4 THREATS 4.4.1 Rising costs in core business CNPC are getting slammed by rising costs in exploration and extraction, the cost of core business in 2002 is ￥252,997 million, in 2006, it has risen to￥538,469 million, an increase of 112%. Besides, the labor cost and a direct consequence of the soaring oil price the energy needed to locate and pump out oil, are all increasing significantly. The price of the steel used in building refineries has soared too, driven up by the demand. Further more, if the Petroleum Exporting countries increase output and overall demand did not rise because of the high oil price, there may be fluctuation in the energy markets. 4.4.2 Higher royalties or entry costs demanded There is no sign of softening of nationalism in many of the oil exporting countries. Though the oil price rising tremendously, the oil-producing countries demand a even huge profit or decide to monopolize in exploring and drilling. In Russia, the Middle East and Africa, oil companies are being asked to pay higher royalties or entry costs to set up or continue operations. CNPC is heavily invested in Iran and Sudan (CNPC Annual Report 2006, page 2), so there will be higher royalties or entry costs demanded.
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5. CONCLUSIONS
The above research and analysis report tried to find out the financial situation and the future developing potentials of CNPC by qualitative, quantitative and SWOT analysis methods based on various operational, financial and other performance over the 5 year period from 2002 to 2006. The author can draw the following conclusions: 5.1 CNPC has achieved good business and financial performance results. CNPC has realized good results in terms of its core business, namely oil & gas exploration and production, refining and marketing of refined products and petrochemical products, witnessed by stable growths in these fields in the 5-year period. CNPC's exploration activities yielded a significant increase in newly discovered oil and gas resources during the period. The success in exploration was due largely to its technology innovation mentioned in its annual reports. In addition, there are high growth rates recorded in sales revenue, in gross profit margin, in operating profit and operating profit margin etc, which demonstrates its progressing in profitability. In aspects of liquidity, CNPC’s average current ratio is 1.38, which is well above the average of SINOPEC, whose average current ratio is 0.80. In terms of debt ratios, lower debt-to-worth ratio of CNPC (with an average of 0.48) compared to SINOPEC (with an average of 1.27) indicates the less risk to repay long term debt. 5.2 CNPC will maintain its growth and development in the future. CNPC ‘s income from core business will be further benefited from the robust trading environment of CNPC such as fabulous market opportunities brought by China’s economy growth, as well as the rising oil price driven by continued oil demand. Furthermore, the established leading market position as the largest oil & gas producer and supplier in China will ensure its future growth. Besides, technology innovation and good reputation attained from participations in safety, the environment and the community are the keys to ensure its sustained development. 5.3 CNPC’s existing problems. Even so, the author found many issues in CNPC that needed to be solved. First, the increasingly high core business cost has become the main issue that obstruct its gross profit margins from being improved; Second, comparatively low operating profit margin ratio and high operating expenses and management expenses as witnessed in 2005 will block its profitability too; Third, irrational share capital structure will restrain the enthusiasms of outsider investors; Finally, such outside environments as possible fluctuations in the energy markets of high oil price and supply-demand imbalance will affect the stability of its profit. On the basis of CNPC’s current core business activities, not only has CNPC performed well in the past, but it is ready for future further development. As one of the three main oil companies in China, CNPC cherishes the opportunity cooperating with the world 20
famous oil companies and are eagerly to seek an international role in the oil industry.
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Apprendix A: share capital structure of CNPC1
Unlisted shares 1.Promotor shares 2.Subscibed legal person shares 3.Employees’ shares 4.Transferred or placed shares 5.Others Listed shares 1.Domestic listed RMB ordinary shares 2.Domestic listed foreign shares 3.Overseas listed foreign shares 4.Others Total number of shares
157,922,077,818 157,922,077,818 0 0 0 0 2,509,890 400,000 0 2,109,890 0 183,020,977,818
Percentage(%) 86.29 86.29 0 0 0 0 13.71 2.19 0 11.53 0 100
Apprendix B: crude oil price movements 1994-2007
1
1.Availablefrom: http://www.sse.com.cn/sseportal/webapp/datapresent/SSEQueryStckStructAct? PRODUCT=601857&COMPANYCODE=601857&COMPANY_CODE=601857&COMPANY_NAME=CNPC 22
BIBLIOGRAPHY Bodie, Zane; Alex Kane and Alan J. Marcus (2004). Essentials of Investments, 5th edition. McGraw-Hill Irwin, 459. F. William Engdahl (2006). USA Out-Flanked in Eurasia Energy Politics? Global research, June 3 Geoff Dyer (2008). Large China issues rouse fear of oversupply. The Financial Times, March 5 Karen Teo (2004). Assets plan for PetroChina in global drive. The Standard, October 25
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Key Skill statement （1477 words）
Preparing for meetings: As required, my Research and Analysis Project was supervised by my mentor Andy Wright, FCCA, ACCA Course director of London School of Business & Finance. We had three meetings in total. During the first two meetings, we discussed how to plan and prepare a RAP and how to write the report. During the last meeting, I gave a presentation of my report. Before the first meeting, I downloaded the Research and Analysis Project Guidelines from the ACCA website and have read through it. The guide gave me a clear insight into the research work and the way I should conduct my meetings with the mentor. I also bought and read the Research & Analysis Project Guide published by Kaplan for more detailed support. After had a clear image of what I should do, I contacted my mentor and arranged my first meeting by email. The day before our first meeting, I emailed Andy my research proposal and confirmed our meeting time. I also prepared a list of questions which I want to ask and a flow chart for my project plan. The next day I met Andy on time at his office in LSBF campus. Following a short introduction, I described the topic I had chosen and reasons for choosing that topic. Then we discussed how to select suitable sources for collecting relevant data and information, the methodology for data analysing etc. The half an hour long session was really fruitful because I had got necessary guidance and suggestions to continue my project. At the end of the meeting we agreed to meet again two weeks later. The schedule before the second meeting was really tight for me. According to my project plan, I should collect all the data needed, organise and process it with spread sheets (MS Excel), and complete the first draft of my RAP. I succeeded within the time constraint and sent a copy of my draft RAP by email to Andy one day before our second meeting. Once more, I prepared a list of problems I encountered in my research. Andy had read through my project before the meeting. In the meeting, he answered my questions. Besides, he figured out some problems he found in my report and gave me helpful advice on how to improve the report. We set our third meeting time and date at the end of the meeting. Before the final meeting, I revised my report and produced slides using MS PowerPoint for the presentation. On our third meeting I presented my work to Andy. During my presentation, Andy asked me several questions related to my research. Besides, he gave me additional advice on my report.
Questioning: Questioning plays an important role in ensuring productive discussion and efficient communication with my mentor. Generally speaking, there are three types of questions, open questions, closed questions and probing questions. Each of them plays a different but 24
weighty role in my meetings. Open questions are designed to prompt a person to communicate further information. I used open questions frequently during my three meetings to gain clarification and suggestions from my mentor especially in the areas where I am not very confident. For example, I asked my mentor “What do you think of that I include an international oil company like BP as comparison with CNPC in addition to SINOPEC?” He said that it was a good idea but it might be time-consuming. Vice versa, my mentor also asked this kind of questions, for example “Why do you think CNPC has a good financial performance from that extent?” To answer this, I explained the ratios I used in my analysis and the indication of these ratios. Closed questions aim to verify whether the listener agrees with the questions being asked. In other words, they seek to confirm information and often simply be answered as a ‘yes’ or ‘no’. During the meetings I encountered numerous closed questions from my mentor, e.g. “Can you access the annual reports of CNPC?” “Are they in English?” Similarly, I asked him closed questions frequently. For instance, I asked him “Should I include oil price movements in the period to analyse CNPC’s financial performance?” Probing questions are used when the initial or first question cannot satisfy the questioner and he wants to go further. My mentor and I both used them in order to get further clarification. The appropriate application of the three types of questions is crucial for my effective communication with my mentor.
Listening: Listening plays an equivalent role in the communication process during my meetings. I got comments and suggestions which aided me in improving my RAP greatly from the mentor by effective listening. I’ve got some personal experience of making the listening efficient. First, I indicate by my manner that I am absorbing what is being said. I prepare a notebook and take notes of the important things mentioned by my mentor; I sometimes repeat back to my mentor what I have heard in my own words; I make eye contact, nod and make short statements such as ‘I see’ during the meetings which I think are very useful in communication. What is worth mentioning here is that the listener should not interrupt the speaker abruptly. Besides, the listener should avoid ‘closed’ body language like folded arms or tuning away. The listener should keep his/her face either positive or neutral regardless of the feelings about what is said is also a wise thing. Communication is a two way process, not only the participants should allow time to each other to listen attentively, but there should be some feedbacks such as finishing sentences for speaker. Furthermore, the listener should clarify understanding of what the mentor means by asking questions in the appropriate time etc. 25
The presentation: Before my third meeting I revised my report and produced slides using MS PowerPoint. The required presentation time is 15 minutes, so I carefully designed the slides in order to give a brief but comprehensive presentation. First, I outlined the key points which I would mention; Next, I made some notes on the key areas so that I could go through them quickly during my presentation; Third, I practised delivering the presentation by saying out to myself. On that day I presented my research work to my mentor within the time limit. Things that went well First, I had planed and practised my presentation before the third meeting so it was possible for me to go through the key points and findings one after another. Besides, the overall process of the presentation was consistent and fluent. Second, I had applied different methods to make the findings clearer to my mentor. For example, I properly integrated text slides with diagram slides; I used the same basic layout for all my slides etc. Third, I had printed my PowerPoint slides and provided a handout to my mentor so it was convenient for him to address different issues during the presentation. Additionally, I had properly answered questions from my mentor. Things that could be improved Although I practised the presentation before the meeting, I still felt a bit nervous. Additionally, I should use some body language or versatile tones to make the presentation more attractive.
Self Assessment of interaction: Communication is defined as a process by which we assign and convey meaning in an attempt to create shared understanding. This process requires a vast repertoire of skills in intrapersonal and interpersonal processing, listening, observing, speaking, questioning, analyzing, and evaluating.1 Successful communication means that you achieved positive results through the process. Berlo’s S-M-C-R, 19602 suggests that a source encodes a message for a channel to a receiver who decodes the message, which is essentially an adaptation of the Shannon-Weaver model. All communication must include six elements: 1) a source: oral, written, electronic, or any other kind of symbolic generator-of-messages; 2) an encoder: translating our own thoughts into words or other symbols; 3) a message: the central element, stressing the transmission of ideas; 4) a channel: through which media; 5) a decoder: deciphering the word or symbols of others into terms which can be easily understood 6) a receiver: to whom 1
Definition of communication Available from: http://en.wikipedia.org/wiki/Communication (accessed at 19 March 2008) 2 David Berlo (1960 ) The Process of Communication (New York: Holt, Rinehart, and Winston) 26
I had applied and developed various communication skills in the interaction with my mentor, such as questioning, listening etc. I prepared in advance of each meeting for the accomplishment I should achieve at the end of each meeting. I used probing questions to clarify what the mentor was exactly meaning for and tried to avoid “noises” that may cause misunderstanding. Furthermore, my IT skills contributed much to my successful and effective communication with my mentor. For instance, I utilised spread sheets (MS Excel) in producing data tables, bar diagrams, line charts etc. I made a PowerPoint document for the presentation at the third meeting.
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THE OUTLINE OF MY PRESENTATION Slide 1:
Ananalysisof thefinancial situationof ChinaNationa l PetroleumCorporation(CNPC ByYanhong Zhao March 2008
Slide 2:
Reasonsforchoosingthetopic
The world ’s crudeoil pricehas increased continuously inrecent years CNPCis seekingits international role The unbalanced oil demand -supply
Slide 3:
Aim sandobjectivesof thereport
Tofindout whether CNPCissuccessful andcompetitiveinthe petroleumindustry. Tofindout whether thecompanyiscapableinmanagingits assets togeneratesalesrevenueor salesincome. Toshowwhether CNPCis efficient inmanagingitsworking capital. Toidentify CNPC ’s strengths, weakness, opportunitiesand threatsinorder tofindwaystoimproveitsperformance. Toshowits potential for sustaineddevelopment.
Slide 4:
28
)
Businessperform anceresultsof CNPC billion barrels
400.00 300.00 200.00 100.00 0.00 2002
2003
2004
2005
25.00
2,500.00
20.00
2,000.00
15.00
1,500.00
10.00
1,000.00
5.00
500.00
0.00
0.00
2006
2002
2003
2005
2006
CNPCRemaining recoverable oil reserves(billion barrels)
CNPCNewly proven gas in place(bcm)
CNPCRemaining recoverable gas reserves(bcm)
DownstreamOperati on
Oil &gas production
Oil &gas production
80 70 60 1050 50 1000 m m t 40 950 30 20900 10850 0800
50
950
40
900
30
850
20
800
10
750
0 2003
2004
2005
CNPCCrudeoil production(mmbbls)
80 70 60 50 40 30 20 10 0 750 2002
2006
CNPCNatural gas production(bcm) 60 products Ref i ned 50 m output(m t) 40 products Ref i ned 30 sal es(m m t) 0 em Maj or 2 ch i cal s 10 m output(m t) bcm
60
1000
bcm
1050
million barrels
CNPCNatural gas production(bcm) million barrels
2004
CNPCNewly proven oil inplace(mmbbls)
CNPCCrudeoil production(mmbbls)
2002
bcm
Oil & gas reserves 500.00
bcm
million barrels
Oil & gas in place 8000.00 7000.00 6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00
2003
2004
2002
2003
Year
2005 2004
2006
0
2005
2006
Slide 5:
Profitability A sset Turnover
45.00% 40.00% 35.00%
￥3.00
30.00%
￥2.50
25.00% 20.00%
￥2.00
15.00%
￥1.50
10.00%
SI N O PECAsset turnover C N PCAsset turnover
￥1.00
5.00%
￥0.50
0.00% 2002
2003
CNPCGrossprofit marg Pin rofi t After Tax
2004
2005
2006
￥0.00 2002
SINOPECGrossprofit margin
2003
R e tu n2 C a p i tal E2 m pl0 o yed 2 0 0 4rn O 0 0 5 0 6
25.00%
120,000
20.00% ROCE( % )
100,000 80,000 PAT(RM BM i l l i on)
15.00% CN PC RO CE SI N O PEC RO CE
CN PC 10.00% SI N O PEC
60,000 40,000 20,000
5.00% 0
2002
2003
2004
2005
2006
0.00% 2002
Slide 6:
Conclusions
CNPChas achievedgoodbusiness and financial performance results CNPCwill maintainits growth and development inthefuture CNPC ’s existingproblems.
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2003
2004
2005
2006
