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.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Going on a diet and taking exercise can be a great route to fitness, but only if you make real changes rather than just lying to yourself. There's a lesson in that for PetroChina.

The state-backed giant on Wednesday posted its smallest half-year profit since a 2000 listing as falling oil prices, narrowing refining margins and the lower cost of domestic gas squeezed every major segment of its business. In line with almost all its peers at home and abroad, returns on PetroChina's capital just keep heading south, even as crude rebounds from its January lows.

Slight Return
Sinopec is a rare oil company that's managed to increase its return on invested capital of late
Source: Bloomberg

There's an exception, though -- Sinopec. In terms of return on capital, it's been doing a better job than even Exxon Mobil of late, thanks largely to a drastic reduction in net debt over the past 18 months.

Crash Diet
Sinopec has eliminated 137 billion yuan ($20.6 billion) in net debt since the end of 2014
Source: Bloomberg

A big part of that comes from the array of assets that have been moved into affiliated companies. Sinopec Finance, Sinopec Oilfield Service, Sinopec Engineering and Sinopec Shanghai Petrochemical are just some of a bewildering army of affiliates that now give investors the opportunity to make discrete bets on Sinopec's distribution of refined products in Shandong province, or its expertise in oil-well-drilling bits.

Investments in affiliates are equivalent to about 7.5 percent of Sinopec's total long-term assets, more than double the 3.5 percent at PetroChina.

It's a Family Affair
Investments in associates as percentage of total long-term assets at China's big three oil companies
Source: Bloomberg

Moving assets into obscure off-balance-sheet entities has an understandably mixed reputation post-2008. But bloated, sprawling giants like China's state-owned oil companies could do a lot to improve the performance of their core businesses and reduce costs in a weak market by spinning off peripheral operations, so it's about time PetroChina's parent is finally getting in on the act.

China National Petroleum Corp., the state-owned group with an 86 percent controlling stake in PetroChina, earlier this week announced plans to inject its financial assets, including a bank stake, into China-listed shell firm Jinan Diesel Engine. In May, asphalt and lubricating-oil maker Xinjiang Dushanzi Tianli High & New Tech, another CNPC-owned shell, struck a deal to buy some of CNPC's engineering assets.

Small Fry
CNPC is injecting assts into China-listed shell firms, the largest of which has a market value of $670 million
Source: Bloomberg
Note: Market capitalization figures for Xinjiang Dushanzi are based on end 2015, and end March 2016 for Jinan Diesel.

CNPC also plans to sell its oilfield-services operations, which if jettisoned as an independent company probably would be the world's fourth-biggest such business by revenue. Shenzhen-traded petrochemical firm Daqing Huake might make a decent shell.

There's just one problem with these plans. The thing Chinese state-owned enterprises lack isn't M&A activity per se, but good M&A. There are plenty of deals that play three-card monte with assets, hiding losses and reassigning debts and generally muddying the picture of how China's national champions make money. Precious few genuinely offload noncore activities and create more productive enterprises.

A case in point: PetroChina in its latest results recorded a 24.5 billion yuan ($3.7 billion) gain from selling its stake in Trans-Asia Pipeline to state-owned asset manager China Reform Holdings.

The income from that transaction was greater than the 17 billion yuan in net profit reported for the period, making the deal crucial to PetroChina avoiding an embarrassing second consecutive quarterly loss. Bizarrely, the gain was also larger than the 15.5 billion yuan declared value of the entire transaction when it was announced in November. "We have yet to figure out" how these two numbers can be reconciled, Jefferies analyst Laban Yu wrote in a note to clients.

If PetroChina's planned spinoffs really turn it into a leaner, meaner state-owned enterprise, there will be much to welcome. But it's hard to believe this government-run leopard is about to change its spots.

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

To contact the authors of this story:
David Fickling in Sydney at
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at