We have a positive stance on PetroChina Co. Ltd (PTR) due to its future growth expectations in both domestic and international markets. The reduction in the number of tracking days of the crude oil basket used as a benchmark to set the prices of petroleum products will be a positive trigger for the company, as it may reduce the loss from the refining and chemical segments of PTR.
Also, PTR is trading at fair multiples and offers a high dividend yield.
The Government of The People's Republic of China regulates the Oil and Gas Industry in China through the National Development and Reform Committee (NRDC), which exercises supervision and regulation over its domestic oil and gas industry, including the granting of licenses for exploration.
The Chinese government adjusts domestic oil prices to reflect international oil price fluctuations. Domestic natural gas prices are also prescribed by the Chinese government.
The Oil and Gas Industry is influenced by three national oil companies - China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) (CEO) and China Petroleum & Chemical Corporation also know as Sinopec (SHI). CNPC is the holding company of PTR.
China's industry policy is driven by the following objectives; (i) maximizing domestic reserves, (ii) encouraging overseas merger and acquisition (M&A) activities, (iii) increasing gas supply over the long term, (iv) increasing oil storage capacity investment, and (v) expanding regional trading.
With a strong presence in northern and western China, PTR controls around 40% of the petroleum retail market. It is China's largest oil and gas producer and seller, and is among the only two companies in China that hold majority onshore licensing rights for exploration and production. It is integrated and engaged in a variety of petroleum and natural gas related activities. In 2011, the production of crude oil was 2.42mn BOPD, while natural gas was 1.09mn BOEPD. PTR has combined proven developed and undeveloped reserves of 22,195mn BOE, of which 9,405mn BOE are undeveloped.
PTR's upstream segment generates around 80% of overall profits in a "normal" year, and it has a domestic retail market share of 39.2% as of 2011.
PTR recorded revenue of $165,654 million in the first half of 2012, an increase of 21% compared to the same period last year. This increase in revenue was achieved through optimized investment, controlled cost and expenditures, which led to relatively fast development in production and operations.
The company reported diluted EPS of $0.05, showing a decrease of 3% as compared to the same period last year. This decrease in profitability can be attributed to higher quantities of imported natural gas, the inverse relation between the cost and selling price of imported natural gas, controlled prices of refined products and regulated macroeconomic conditions, and higher costs leading to lower earnings.
Exploration and Production
Revenue of the Exploration and Production segment increased by 3.9% for the first half of 2012 as compared to the same period last year. The increase in turnover was due to the rise in crude oil and natural gas prices. The average realized crude oil price in the first half of 2012 was $107.98 per barrel, representing an increase of 6.26% from $101.62 per barrel in the first half of 2011. The production of hydrocarbons has also witnessed an increase as can be seen in the table below.
Crude oil output Million barrels
Marketable natural gas output
Oil and natural gas equivalent output
PTR's oil and gas lifting cost was $11.27 per barrel for the first half of 2012, representing an increase of 9.52% as compared to the first half of 2011. The Exploration and Production segment witnessed an increase of 9.7%, compared to the same period last year, and remained the key contributor to the profitability of the company.
Refining and Chemicals Segment
Revenue of the Refining and Chemicals segment witnessed an increase of 3% compared to the same period last year. The increase in the revenue was due to the increase in prices of major refined products.
PTR was successful in optimizing allocation of resources and strived to tap into potentials to boost performance. However, a slowdown in the growth of the Chinese economy, a weak petrochemicals market and the macroeconomic regulation and controlled prices of refined products by the Chinese government, led to a loss for the Refining and Chemicals segment from operations of about $4.5 billion, of which 81% was due to the refining business and 19% was due to the chemicals business.
Revenue for the Marketing segment saw an increase of 12.9% for the first half of 2012, compared to the first half of 2011, which was due to an increase in operating income from trading of oil products.
The profitability of the marketing segment witnessed a decrease of 26% as compared to the same period last year due to a slowdown in the growth of the Chinese economy and the low demand for refined products.
Natural Gas and Pipeline
Revenue of the Natural Gas and Pipeline segment increased by 20.2% in the first half of 2012, compared to the first half of 2011 due to a higher sales volume of natural gas and the ongoing development of city gas and the LPG businesses.
The profitability of the segment witnessed a decrease of 85%, due to a widening in losses from natural gas imports from Central Asia and LNG imports.
Cash Flow from Operations, Capital Expenditures, and Cash and Cash Equivalents
The cash flow from operations for the first half of 2012 was recorded at $6.9 billion, showing a decrease of 65% as compared to the same period last year. The decrease in the cash flow from operations is due to the increased working capital requirements and reduced earnings.
Capital expenditures for the first half of 2012 were recorded at $20.1 billion, showing an increase of 26% as compared to the first half of 2011. This is a red flag for the company as a continuation of the trend would hamper the ability of the company to pay dividends in the future. However, the company currently has about $14 billion in cash and cash equivalents, and can continue to pay out dividends for the time being.
Pricing of Refined Products
The NDRC sets the prices of refined products through a system that keeps track of the 22-day moving average of a basket of crudes, which includes Brent, Cinta (Indonesia) and Dubai. According to market sources, China intends to revise its pricing system to track the prices of crude more efficiently, and one of the considerations is to reduce the above-mentioned pricing cycle to 10 days.
Increased Reliance on Production from Foreign Regions
PTR aims to increase the contribution of its production of oil and gas from overseas resources to half of its total production. The production of hydrocarbons witnessed an increase of 0.9% (62.5 barrels per day), which accounts for about 9.4% of the total output of PTR for the first half of 2012.
The company is considering investment opportunities for refining and storage assets in the Americas and the Caribbean, to set up trading operations in the region this year.
PTR intends to continue with its "Peak Growth in Oil and Gas Reserves" program and will undertake the following actions in the second half of 2012 to spur growth:
Exploration and Production
- The company will concentrate on key regions, large basins and new oilfields.
- PTR will strive to improve its hydrocarbon exploration and emphasize on gas exploration.
- PTR will continue to promote fine water injection in oilfields and to enhance crude oil production.
- PTR will try to increase its domestic natural gas production, reducing reliance on imported natural gas.
- PTR will focus on the exploration and development of tight gas. Increasing the speed of improving the reserves and production of coal seam gas, and explore technologies for the exploration of shale gas formations.
Refining and Chemicals
PTR will try to reduce losses and increase the profitability of the segment by the following actions:
- Directing resources towards best oil processing methods.
- Improve product competitiveness and value addition.
- Optimize the processing load among refineries.
- Improve arrangements for maintenance and repair work.
- Increase sales by exploring new markets.
- Emphasize on market analysis, improve flow of resources, increase sales of petrochemical products and scientifically implement sales and marketing.
- Develop operations of fuel oil, lubricants and non-oil business effectively.
- Develop the jet fuel market to increase profitability.
- Increase the development of service stations and construct storage facilities to increase its sales and distribution network.
Natural Gas and Pipelines
- Develop high margin markets, and the markets surrounding oil and gas fields.
- Target clients in traditional markets to increase sales.
- Commission its new pipelines to improve sales to new users and increasing contributions of new markets to sales.
- Develop downstream businesses such as city gas and compressed natural gas (CNG), to increase the value creation of the natural gas business.
The company's profitability has been hurt by the efforts of the Chinese government to curtail inflation by controlling and regulating the prices of refined products. With the government reducing the number tracking days for the benchmark crude basket to set prices, we believe the profitability of PTR will improve.
The company is expected to experience growth based on the future plans mentioned above. However, the stock is trading at comparable forward P/E, EV/EBITDA and P/S multiples of 7.9x, 5.5x and 1.4x and offers the highest dividend yield of 3.7%, and the lowest P/B multiple of 0.9x, among the peers mentioned below. Therefore, we have a positive stance on the stock.
PetroChina Co. Ltd
CNOOC Ltd (CEO)
Chevron Corp (CVX)