Sinopec to Cut Capital Spending 4.2%

HONG KONG—China’s top refining company joined the country’s largest oil producer in saying it would cut capital spending this year.

Fu Chengyu

China Petroleum & Chemical Corp. 600028.SH -0.38% said Sunday that it would reduce capital expenditures 4.2%. PetroChina Co. said Thursday that it would cut capital spending7%.

The two state-controlled oil companies have spent tens of billions of dollars to buy overseas oil and gas assets in the past decade. Sinopec, as China Petroleum is known, PetroChina601857.SH +0.26% and their parent companies have spent $26 billion on acquisitions in the past year alone, data provider Dealogic said. That has put their combined free cash flow, or operating cash flow minus capital expenditures, into negative territory.

Sinopec’s net profit for last year rose 3.4% to 66.1 billion yuan (US$10.6 billion) from 63.9 billion yuan a year earlier. Analysts polled by Thomson Reuters had forecast 69 billion yuan for last year.

“Looking ahead to 2014, we expect the global economy to continue its recovery,” Sinopec Chairman Fu Chengyu said in a written statement. “We will continue to deepen reform, focus on the quality and profitability of development…and strive to achieve better results in production and operations.”

Returns for China’s major oil companies have declined for the past seven years as the companies have expanded investment. “In the past, we put great emphasis on speeding up our scale through high-intensity investments,” PetroChina Chairman Zhou Jiping said recently.

To improve results, Sinopec and PetroChina are restructuring their refining and marketing businesses by taking on investors. Sinopec said last month that it would allow outsiders to own as much as 30% of its marketing-and-distribution business, which includes more than 30,000 gasoline stations.

Other international energy companies, such as Exxon Mobil Corp. XOM +0.48% and BPBP.LN +0.74% PLC, have been scaling back spending and selling noncore assets, partly in response to a 15% slump in crude prices over the past two years.

The core of Sinopec’s operations is in oil refining and sales, but those segments aren’t as attractive as other parts of the oil-and-gas business. Sinopec recorded an operating profit of 8.6 billion yuan from its refining business last year—recovering from an operating loss of 11.4 billion yuan a year earlier—in part because the government raised gasoline and diesel prices in September.

China’s government often puts pressure on its refiners not to raise fuel prices when global crude-oil costs surge, helping to keep a lid on inflation.

PetroChina and Sinopec control more than 80% of China’s refining capacity.

Analysts said Sinopec and PetroChina might shift spending in favor of businesses with higher returns, such as exploration and production.

“The impact of capex reduction and shift in allocation to upstream will end the seven-year cycle of declining returns, although any improvement will likely be gradual,” Bernstein Research senior analyst Neil Beveridge said last month.

PetroChina on Thursday reported a 12% increase in 2013 net profit to 129.6 billion yuan.

Offshore oil-and-gas producer Cnooc Ltd. 0883.HK +1.42% is scheduled to release its results on Friday.