PetroChina Co Ltd, the world's fourth-largest oil producer, posted a 13 percent slide in second-half earnings - its worst six-month showing since 2002 - as costs bit and refining losses deepened.
With oil prices steady at below $60 a barrel and not expected to rise much this year, and constraints on Chinese oil output, the market expects tepid 2007 earnings growth for PetroChina, Asia's largest crude producer.
That would mark a dramatic change after net profit surged 28 percent in 2005, although the company said it would try to offset waning output from ageing fields with acquisitions and stepped-up gas operations.
"That's the one upside. That's the one reason to keep them in the game, is they might actually go buy some oil," said Larry Grace at Kim Eng Securities.
But he added: "They're over-emphasising gas. I think it's a bad move. They're not very good at producing gas."
PetroChina's 2007 may hinge also on whether Beijing allows it to charge more for refined products. The government has failed to raise diesel and gasoline prices as quickly as global oil markets, resulting in huge losses at domestic refiners.
PetroChina said July-December net profit was 61.54 billion yuan ($7.96 billion) versus 71 billion yuan a year earlier. The result fell far short of a consensus forecast for 68.64 billion yuan from 16 analysts surveyed by Reuters Estimates.
The firm said it hoped to expand oil and gas by 5.3 percent to 1.116 billion barrels of oil equivalent (BOE). That follows a dismal fourth quarter, when the firm posted its slowest quarterly pace of production expansion. In all of 2006, the company eked out a less than 1 percent more crude.
PetroChina is the largest of China's energy triumvirate, which includes top Asian oil refiner Sinopec Corp and offshore specialist CNOOC Ltd.
Shares in PetroChina, whose shareholders include Warren Buffett, rallied 33 percent in July-December, beating CNOOC's 19 percent rise but underperforming Sinopec's 62 percent gain. The index of Hong Kong-listed Chinese firms jumped 52 percent over the same period. PetroChina trades at nearly 10 times forecast earnings, in line with Exxon Mobil's 11.3 and BP's 9.7.
Executives said PetroChina might have unearthed China's biggest oil discovery in 10 years in the Bohai Bay region and its biggest natural gas find in Sichuan. Details of those would be announced later, the company said.
But this year, PetroChina is expected to battle the same forces that held it back in the second half. Crude prices rose to a record $78.10 last July, but dropped more than 17 percent in July-December as operating costs at the firm's exploration division leapt 56 percent.
The firm intends to bump up spending on exploration and production - which accounts for more than three-fifths of overall spending - by 9.5 percent to 115.2 billion yuan in 2007. Total capital spending would be 185.7 billion yuan. Another perennial drag on the bottom line is a loss-making refining division - a mirror of rival Sinopec. PetroChina intends to accelerate refining with a target to process 822.8 million barrels of oil in 2007, up nearly 5 percent.