20161027-美银美林-中国石油股份-00857.HK-3Q16_weak_results_on_E_P_losses__Expect_turnaround_with_improved_O_G_prices_11页_719kb

PetroChina Q3 2016 Performance and Investment Summary

Core Content Overview

PetroChina reported a significant decline in net profit for the third quarter of 2016, with a net profit of RMB1.2bn, representing a 77% decrease from the same period in 2015. This was primarily due to upstream (E&P) losses, which turned from RMB13.6bn profit to RMB1.5bn EBIT loss. The oil and gas output decreased by 4.2% YoY, with oil production down by 7.9% and gas up by 3.3%, but the company remains on track to meet its full-year target. The realized oil price dropped by 4% to $41.4/bbl, while gas price fell by 33% to US$4.3/mcf.

Main Highlights

• E&P Performance:

  • EBIT losses of RMB1.5bn in 3Q16, down from profits of RMB13.6bn in 3Q15.
  • The drop in E&P performance was due to lower realized gas prices, which were impacted by a city gate non-residential gas price cut in 4Q15, weak domestic demand in 3Q16, and lagged effects of lower oil prices on overseas gas prices.

• Downstream Performance:

  • Refining, marketing, and chemicals segments performed strongly, turning a RMB5bn loss in 3Q15 into a RMB9bn profit in 3Q16.
  • Strong downstream margins were a key driver of this performance.

• Valuation:

  • PetroChina's valuation is considered deeply discounted, with an EV/2P reserve ratio of only $3.8/boe, significantly lower than global peers and other China oil majors.
  • The implied long-term oil price is $63, which is lower than CNOOC's $85 and the base assumption of $80.

• Investment Recommendation:

  • The report recommends a "Buy" rating for all share classes (H, A, ADR).
  • The company is highlighted as the top pick among China oils due to its high earnings beta to oil price, attractive E&P reserve valuation, and subsiding policy risks with upside potential.

Key Financial Data

E&P Turnaround Outlook

• The E&P segment is expected to turn around in 4Q16, with the highest beta to oil prices.
• The company is well positioned to benefit from the anticipated recovery in oil prices during 2017-2018.
• The realized gas price is expected to normalize with the recovery of global crude oil prices and potential gas price hikes during the winter and in 2017.

Investment Rationale

• High Earnings Beta: PetroChina's earnings are highly sensitive to oil price changes, with an estimated 10% change in '17E EPS per $1/bbl change in oil price.
• Attractive E&P Reserves: E&P reserve valuation is considered highly attractive compared to China oils and global peers.
• Policy Risk Subsiding: Policy risks are expected to decline as oil prices recover, offering upside potential to the consensus.

Risks

• Oil Price Recovery: Slower recovery from oil price gluts, weak seasonal demand, abnormal weather, and geopolitical risks.
• Gas Pricing Policies: Adverse policy moves in gas pricing and refining windfall profits.
• Pipeline Sale: Potential breakdown of the Pipeline asset sale.

Analyst Certification

• The report is certified by Imyoung Do, CFA, who confirms that the views expressed reflect his personal opinion and that no part of his compensation is tied to the report's recommendations.

Company Overview

• PetroChina is a fully integrated oil and gas company, the largest in China.
• Engaged in exploration, production, refining, chemicals, marketing, and natural gas pipeline operations.

Valuation and Price Objectives

• Price Objective (H Share): HK$10.08
• Price Objective (A Share): CNY7.38
• Price Objective (ADR): US$70.15
• The valuation is based on a Sum-of-the-Parts (SoP) approach, with DCF for E&P, P/B for Pipeline, and EV/EBITDA for refining, chemical, and marketing segments.

Summary of Key Financial Ratios

Conclusion

PetroChina's performance in Q3 2016 was heavily impacted by E&P losses and falling realized gas prices, but the downstream segments showed strong performance. Despite these challenges, the company is viewed as a top pick in China's oil sector due to its attractive reserve valuation, strong earnings potential with oil recovery, and subsiding policy risks. The valuation is at a deep discount, making it an attractive investment opportunity.