- PetroChina achieved its best first quarter earnings in seven years in 1Q 2021, which led to its stock price rising by +4.2% post-results announcement.
- However, PetroChina's strong 1Q 2021 financial performance was partially boosted by certain one-off factors, which might not be repeated in subsequent quarters.
- PetroChina's 2021 capital expenditure guidance seems low in relation to its output growth targets, and higher-than-expected capital expenditures could possibly lead to lower-than-expected dividends.
- The market values PetroChina at 8.8 times consensus forward FY 2021 P/E, and the stock boasts a consensus forward FY 2021 dividend yield of 7.6%.
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I maintain my Neutral rating for PetroChina Company Limited (PTR) [857:HK].
PetroChina's stock price rose by +25% from $29.02 as of November 2, 2020 to $36.50 as of May 3, 2021, following my initiation article on PetroChina that was published on November 3, 2020.
PetroChina achieved its best first quarter earnings in seven years in 1Q 2021, which led to its stock price rising by +4.2% post-results announcement. However, PetroChina's strong 1Q 2021 financial performance was partially boosted by certain one-off factors, which might not be repeated in subsequent quarters.
Also, PetroChina's 2021 capital expenditure guidance seems low in relation to its output growth targets, and higher-than-expected capital expenditures could possibly lead to lower-than-expected dividends.
The market values PetroChina at 8.8 times consensus forward FY 2021 P/E, and the stock boasts a consensus forward FY 2021 dividend yield of 7.6%. While PetroChina's valuations are reasonably attractive on an absolute basis, the other two listed Chinese oil majors trade at even lower P/E multiples and offer higher dividend yields. PetroChina's valuation premium vis-a-vis its peers despite market expectations of lower ROEs on a relative basis justifies a Neutral rating for PetroChina.
Best First Quarter Earnings In Seven Years
PetroChina reported the company's 1Q 2021 financial results on April 29, 2021 (before trading hours), and its stock price increased by +4.2% from $35.78 as of April 28, 2021 to $37.28 as of April 29, 2021. Although PetroChina's share price subsequently corrected slightly to close at $36.50 as of May 3, 2021, the positive post-results announcement share price performance implies that investors were pleased with PTR's 1Q 2021 earnings.
PTR turned around from a net loss attributable to shareholders of -RMB16.2 billion in 1Q 2020 to register a positive net income of +RMB27.7 billion in 1Q 2021. This was mainly driven by a recovery in oil and gas prices as per the chart below. It is also noteworthy that PetroChina's recorded the highest quarterly earnings in the past seven years with its 1Q 2021 net profit of RMB27.7 billion; its prior 1Q earnings peak was RMB34.3 billion registered in 1Q 2014.
Historical Energy Price Trends
Source: PetroChina's 1Q 2021 Results Presentation Slides
Watch Out For One-Off Factors
Apart from a general recovery in energy prices as highlighted above, PetroChina also benefited from certain one-off factors which might not be sustained going forward.
A key one-off factor is a higher proportion of low-cost imported gas which boosted the profits of PetroChina's Natural Gas & Pipelines business in 1Q 2021. The company's Natural Gas & Pipelines segment witnessed a +63% YoY increase in operating income from RMB11.4 billion in 1Q 2020 to RMB18.5 billion in 1Q 2021. This was the result of a +11% increase in imported gas volume in the most recent quarter, which helped to lower the costs for the Natural Gas & Pipelines business.
The cost of imported gas was low in 1Q 2021 because of the typical nine-month lag between imported natural gas prices and international crude oil prices (low crude oil prices in early-2020 only reflected in 1Q 2021 imported gas prices), and the appreciation in RMB vis-a-vis the USD over the same period. Looking ahead, the profitability of PetroChina's Natural Gas & Pipelines business segment is expected to likely contract in the coming quarters, as imported natural gas prices "catch up" with international crude oil prices.
Another key one-off factor in 1Q 2021 was non-cash inventory gains which were positive for PetroChina's Refining business. The company's Refining business reversed from a -RMB6.3 billion operating loss in 1Q 2020 into a +RMB10.2 billion operating profit in the most recent quarter. But PetroChina's RMB10.2 billion segment operating profit in 1Q 2021 included an inventory gain of +RMB5.3 billion.
At the company's 1Q 2021 earnings call on April 30, 2021, PetroChina emphasized that "as international oil prices stabilizes without the inventory gain, we can manage to maintain a stable gross margin" that "might be as high as the first quarter." However, given the extent of the impact of the inventory gains on the Refining business' 1Q 2021 operating income and the expected rise in the cost of imported gas, I am not entirely convinced that PTR's strong earnings for the Refining and Natural Gas & Pipelines businesses and the company as a whole can be sustained for the rest of the year.
Market consensus expects PetroChina to deliver a normalized net profit of RMB65,971 million for full-year FY 2021 based on S&P Capital IQ. This implies an average quarterly normalized net profit of RMB12,750 million for the three quarters 2Q 2021-4Q 2021 (versus 1Q 2021 earnings of RMB27,721 million). This validates my view that PetroChina's earnings growth should slow in the subsequent quarters of 2021.
2021 Capital Expenditures Target Seems A Tad Too Low
Looking ahead, PetroChina has guided for capital expenditures of RMB239.0 billion in 2021, representing a -3.0% YoY decline as compared to 2020. However, PetroChina is targeting a +3.2% and +0.2% growth in natural gas and crude oil output, respectively this year.
A decline in capital expenditures does not seem to be aligned with expectations of an increase in natural gas and crude oil output. In other words, there is a possibility that 2021 capital expenditures could be raised later in the year, which might translate into lower dividends.
PetroChina's consensus forward FY 2021 dividend yield of 7.6% is equivalent to a rather high dividend payout ratio of 68%. If actual capital expenditures turn out to be higher than expected, PetroChina's FY 2021 dividends could potentially disappoint the market.
Valuation And Risk Factors
PetroChina is valued by the market at consensus forward FY 2021 and FY 2022 normalized P/E ratios of 8.8 times and 7.5 times, respectively according to the company's stock price of $36.50 as of May 3, 2021.
The stock offers consensus forward dividend yields of 7.6% and 7.3% for the current year and the next year, respectively.
Separately, the company is expected to see its ROE improve from 1.6% in FY 2020 to 5.5% in FY 2021, prior to declining to 4.6% in FY 2022, based on market consensus' estimates.
Although PetroChina's forward P/E valuations are undemanding on an absolute basis, PTR trades at a significant premium to the other two Chinese oil majors despite boasting relatively lower forward ROEs. Also, PetroChina's forward dividend yields are less attractive than that of its peers. As such, my Neutral rating for PetroChina takes into consideration the fact that there are more attractive investment candidates if one wishes to bet on the recovery at energy prices in the future.
Peer Valuation Comparison For PetroChina
|Stock||Consensus Current Year P/E Multiple||Consensus Forward One-Year P/E Multiple||Consensus Current Year Dividend Yield||Consensus Forward One-Year Dividend Yield||Consensus Current Year ROE||Consensus Forward One-Year ROE|
|China Petroleum & Chemical Corporation or Sinopec (SNP) [386:HK]||6.9||7.1||9.3%||9.0%||8.0%||7.3%|
|CNOOC Limited (CEO) [883:HK]||5.2||4.8||9.2%||10.2%||12.8%||12.9%|
Source: S&P Capital IQ
PetroChina's key risk factors are a larger-than-expected decline in energy prices going forward due to a resurgence of the pandemic, and an unexpected cut in dividends.
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This article was written by
The Value Pendulum is an Asian equity market specialist with over a decade of experience on both the buy and sell sides.
He is the author of the investing group Asia Value & Moat Stocks, providing ideas for value investors seeking investment opportunities listed in Asia, with a particular focus on the Hong Kong market. He hunts for deep value balance sheet bargains and wide moat stocks and provides a range of watch lists with monthly updates within his investing group.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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