Denial is not a stockpicking strategy. Last year’s pastime, watching gold prices fall, has given way to watching oil prices drop. Yet analysts’ expectations for Chinese oil companies have not changed much. Oil prices have fallen a quarter since June. Analysts’ targets have been largely unmoved.
Then, on Wednesday, Chinese oil producers Cnooc and PetroChina announced third-quarter earnings. Both missed analysts’ forecasts. Shares in PetroChina slipped 2 per cent and Cnooc dropped 5 per cent; analysts cut their recommendations on the latter. Oil prices were still not to blame. The problem was Cnooc’s production outlook. The previous growth goal of 6-10 per cent excluded Nexen, acquired last year. The outlook was unchanged but included the Canadian company, implicitly lowering the forecast.
It is only one quarter. Hence PetroChina’s relative stability. But cheap oil may yet do more damage. Chinese majors price their sales off spot crude with a lag of about one month, according to Barclays. This means at least one more poor quarter to come. And even if a half year of weak earnings does not hit share price targets, sustained low prices must.