20150707-招商证券_香港_-CHINA_OIL___GAS_TIDE_EBBS_TIDE_FLOWS_77页_2mb

Summary of China Oil & Gas Industry Report

Core Content

This report provides an in-depth analysis of the China oil and gas sector, focusing on the current market dynamics, reform initiatives, and valuation outlook. It highlights the moderate recovery in oil prices, the structural changes in the industry, and the evolving role of domestic and international players.

Main Views and Key Information

Oil Price Recovery Outlook

• The report is positive on the moderate recovery in oil prices due to:
  • A likely curbed US shale production amid reduced drilling activities.
  • A rebound in global oil demand during the low oil price environment.
  • Historical trends showing oil prices rebound after a collapse.
• Estimated Brent oil price for 2015/16 is USD65/75/bbl, down from USD99/bbl in 2014.
• WTI oil price is expected at USD60/70/bbl, assuming a consistent USD5/bbl premium over Brent.

Reform Focus

• The reform in China's oil and gas industry is expected to focus on increasing competition and liberalizing energy prices.
• Entry barriers are likely to be lowered, and energy prices will be more market-driven.
• Sinopec is expected to continue pushing for the spin-off of its marketing division, despite delays due to management changes.
• PetroChina's pipeline segment may undergo significant restructuring, potentially unlocking value of HKD2.5/share.

Sector Preference

• The report prefers oil majors (PetroChina and CNOOC) over oilfield services players (COSL and SSC).
• PetroChina is the top pick due to its potential to benefit from oil price recovery and downstream business turnaround.

Valuation Outlook

• The China oil sector is trading at 1.0x 2016E P/B, which is considered attractive.
• Oilfield players are fairly valued at 0.9x 2016E P/B.
• Key risks include oil price volatility and uncertainties related to reform.

Natural Gas Market

• Natural gas demand grew at 15% CAGR from 2007-14, but growth is expected to slow to 4.5% in 2015 due to price premiums over alternatives.
• The central government aims to increase the share of natural gas in total energy consumption from 6% in 2014 to 10% by 2020.
• Natural gas price is regulated and linked to imported fuel oil and LPG.
• The report expects a 20% or RMB0.4/cu.m cut in natural gas prices in 2016, based on the average price in 2H14-1H15.
• Natural gas demand is projected to grow at 13% CAGR during the 13th FYP period, with imports accounting for 38% of total consumption by 2020.

Energy Consumption Trends

• Energy consumption growth has slowed, with an elasticity of 0.3x in 2014 compared to GDP growth of 7.4%.
• The elasticity is expected to remain below 0.5x during the 13th FYP period.
• The energy consumption per unit GDP is projected to decline from 0.79 in 2014 to 0.55 in 2020.

Management Reshuffle

• A major management reshuffle occurred in May 2015 among the three major oil companies due to corruption investigations.
• The retirement of key executives was expected, but the step-down of Fu Chengyu (Sinopec) came earlier than anticipated.
• The new leadership is expected to bring fresh perspectives and focus on operational efficiency and investor communication.

Reform Scenarios

• The report discusses potential reform scenarios, including:
  • Scenario 1: Merger between PetroChina and Sinopec is unlikely due to the risk of creating a monopoly.
  • Scenario 2: Merger between Sinochem and CNOOC is not expected to yield significant synergies.
  • Scenario 3: Spin-off of pipeline assets is considered reasonable, with independent listing as a practical option.
  • Scenario 4: Spin-off of professional subsidiaries (e.g., oilfield services, equipment manufacturing) is likely, aimed at improving transparency and competition.

Global Oil Market Outlook

• OPEC has stepped down from its market balancing role, with production quotas unchanged despite a global oil glut.
• US shale production has been a key driver of global oil supply, but has declined significantly due to low oil prices.
• US oil production is expected to drop on a monthly basis since June 2015, with a peak of 5mbpd in 2020 and a decline to 3mbpd by 2040 in the low oil price scenario.
• The breakeven price for US shale producers is estimated at USD58/bbl for WTI, with core production areas remaining economical at prices below USD50/bbl.

Company Ratings and Valuation

Conclusion

The China oil and gas industry is expected to undergo significant reforms aimed at improving efficiency and competition. While oil majors like PetroChina and CNOOC are favored due to their potential to benefit from oil price recovery and restructuring, oilfield services players face more challenges due to prolonged upstream capex cuts. The natural gas market is anticipated to experience short-term pain but long-term growth, supported by government policies and increasing demand for cleaner energy. Global oil markets are expected to see moderate recovery, with the US shale industry playing a pivotal role in supply dynamics.