Energy

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Shares in China's big three oil companies sold off after the trio reported first-quarter results late Thursday. There's a bullish signal for oil producers buried in that negative movement.

On the numbers, Sinopec was the standout performer. First-quarter profit more than tripled to 6.66 billion yuan ($1.03 billion), thanks to its lion's share of China's refining capacity. Cheap oil is a problem if you're mostly selling the stuff, but a boon if crude is your raw material.

So what's going on with the shares? Sinopec fell as much as 4.3 percent in morning trading. PetroChina, which posted its first quarterly loss since listing in 2000, was down as much 4.7 percent. Cnooc, the most leveraged of the three to weakness in the price of crude, came off best with a 2.9 percent decline, despite reporting a 31 percent revenue slump.

The activity makes more sense if the companies are seen as alternative wagers on the direction of the oil market.

Sinopec is the one to buy if you're feeling bearish on crude. While its exploration and production costs are the highest of the group, that refining capacity has made it a beneficiary of all that cheap oil sloshing around the global market in recent months.

Bad Timing
Sinopec's exploration costs have surged just as oil prices have plunged
Source: Bloomberg Intelligence, Bloomberg calculations

Cnooc is a more or less pure play on upstream production whose single refinery barely moves the needle, so it would be the winner from any price recovery. With the lowest production costs of the three, it also expanded output at a rapid lick during 2015: Production was up 18 percent on the year, compared with a 2.8 percent gain at PetroChina and a 3.1 percent decline at Sinopec, according to Bloomberg Intelligence.

Bottom of the Barrel
Cnooc's production costs are the lowest among China's oil majors
Source: Bloomberg Intelligence, Bloomberg calculations

PetroChina, with more production than the other two combined (4 million barrels daily) as well as a sizable downstream business, is the Exxon Mobil to pick when you're not quite sure what's about to happen. 

Saved by a Whisker
PetroChina's cost cuts mean it's making money at current crude prices
Source: Bloomberg Intelligence, Bloomberg calculations

Owing to the collapse in crude prices over the past year, Sinopec has for some time been the stock most favored by analysts: 64 percent have a rating equivalent to ``buy" on the stock, compared with 46 percent for PetroChina and 41 percent for Cnooc. Sinopec also has the strongest balance sheet, due in large part to a string of asset sales in recent years. Ebit during 2015 was enough to cover interest payments more than six times over, compared with a slightly alarming ratio of 0.9 at Cnooc, according to data compiled by Bloomberg.

Strong Foundations
Sinopec has the highest interest cover ratio among China's oil majors
Source: Bloomberg data
Note: Defined as Ebit/Interest

There are still plenty of reasons to doubt whether the current oil rally has legs. 

Consumption is looking patchy. Domestic fuel sales from Sinopec and PetroChina barely grew during the quarter, due in large part to a slump in industrial diesel use, as Gadfly's Liam Denning explains. Still, a surge in auto sales toward the end of last year helped the country's apparent gasoline demand climb 8.1 percent in the March quarter, healthy if unspectacular by Chinese standards.

Falling share prices generally aren't good news for any company. But with Brent crude up 29 percent so far this year and touching the highest in almost six months on Thursday, bullish bets on oil companies are on the rise.

BP shares reached their highest level since January after the company reported better-than-expected first-quarter results this week, and capital has been flowing into the upstream industry almost as fast as it cleared out last year. The exploration and production sub-index of the S&P 500 is up about 17 percent so far this year, compared with a 9 percent decline in the refiners' sub-index and a 13 percent improvement in integrated oil businesses:

Making It
Shares in upstream oil and gas businesses have been the best performers so far this year
Source: Bloomberg data
Note: Rebased. Dec. 31, 2015=100

Friday's price action is a sign that the same mood has spread to China. Sinopec might have been hoping to get some credit for its strong profit performance, but the opposite was the case.

Indeed, Cnooc's valuation, based on blended forward 12-month enterprise values to Ebitda, has surged ahead of Sinopec's in recent months, rising to its highest level in more than five years last week:

Game Changer
Valuations of China's oil majors, blended forward 12 month EV/Ebitda
Source: Bloomberg data

If there's wisdom in Chinese crowds, that less pessimistic view suggests it's worth trimming your most bearish expectations for oil producers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net