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Morningstar | PetroChina’s 1Q Results Disappoints on Refining Earnings; Shares Fairly Valued

We cut no-moat PetroChina’s fair value estimate to HKD 5.10 per share ($65 per ADR, CNY 4.38 per share) from HKD 5.20 ($66, CNY 4.40), following the announcement of its disappointing first-quarter results. We think the firm is fairly valued at the current price level with recent strength in oil prices largely priced-in. That said, the impending creation of a national pipeline company could be a catalyst for the stock. PetroChina’s first-quarter 2019 net profit was up 1% year over year to CNY 10.3 billion. This was below expectations as weak refining and chemicals earnings dragged down stronger performance from all other segments.

PetroChina's exploration and production segment reported a 47% jump in earnings, with output in the first quarter rising 6% year over year to 390.1 million barrels of oil equivalent, which was above our expectation. This helped to offset a 6% fall in average oil selling price to USD 59.53 per barrel while average gas selling price was up 5% to USD 6.63 per thousand cubic feet. In addition, the oil and gas lifting cost was well contained, decreasing by 1.5% year over year. Our midcycle Brent oil price assumption of USD 60 per barrel is unchanged and we expect this segment to remain profitable in our five-year explicit forecast period.

On the other hand, earnings for the refining and chemicals division were down 64% year over year. While the volume of processed crude oil rose 3% year over year, the refining operations were hit by inventories losses and adjustment to its internal price mechanism (likely selling to marketing segment at lower price). We do not expect a sharp turnaround in earnings as competition remains intense and refined oil is oversupplied in China. Meanwhile, the firm’s efforts to revive the marketing segment are bearing fruit, with earnings for the segment up 89% year over year on the back of higher selling prices, internal price marketization, and development of high profitability overseas markets.

The natural gas and pipeline profit contribution rose 12% year over year, largely attributable to higher sales volume and natural gas selling prices. In particular, loss from imported gas and LNG reduced sharply by 44%. We believe the firm has benefited from more market-driven gas pricing reform (such as winter price hikes) and earnings from this segment will continue to improve with the gradual liberalization of natural gas prices in the long term.

The firm’s capital expenditure increased by 3% year over year to CNY 59 billion, accounting for 20% of its full-year target. We expect PetroChina to be able to achieve its plan given that first-quarter spending is seasonally slower.