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Morningstar | PetroChina's 2018 Results Within Guidance; Reducing FVE to HKD 5.20. See Updated Analyst Note from 22 Mar 2019

No-moat PetroChina’s 2018 net profit of CNY 52.6 billion, up 131% year over year, was in line with preliminary guidance. The sharp turnaround was mainly attributable to higher oil and gas selling prices and better performance from the natural gas and pipeline segment. We are lowering our fair value estimate to HKD 5.20 per share ($66 per ADR, CNY 4.40 per share) from HKD 5.40 per share ($69 per ADR, CNY 4.76 per share) after taking into account higher-than-expected capital expenditure and our updated foreign exchange assumptions. We expect earnings for the firm to remain strong in 2019 in the absence of significant asset-impairment losses (CNY 34.6 billion in 2018), but we believe this has been largely priced in by the market. We think PetroChina is fairly valued while news flow on the impending spin-off of its pipeline assets could continue to support the share price. Details on the spin-off remain scant, but management is confident that it will be done based on market valuation. The full-year dividend for 2018 is CNY 0.18 per share, translating to a dividend yield of about 4%.

PetroChina’s oil and gas production was up 2.3% year over year to 1.49 billion barrels of oil equivalent in 2018. In 2019, the firm plans to raise its production by 3.3% with stronger growth in natural gas output, given the higher profitability and demand. We see some cost pressure going forward for this segment as PetroChina’s unit oil and gas lifting cost was up 6.8% year over year to USD 12.31 per barrel in 2018 (or 4.6% excluding exchange rate impact). That said, we think this will be partly mitigated by a stronger yuan.

The firm’s natural gas and pipeline segment saw earnings increasing 63% year over year as loss from the sales of imported gas has been contained at CNY 25 billion (up 4% year over year) in 2018 despite substantial increase in volume of imports.

We think the more market-driven gas pricing reform (such as winter price hikes) and higher gas prices have aided the segment’s performance, and we expect earnings to remain robust.

Despite a hiccup in the fourth quarter due to lower oil prices and inventory losses, the refining and chemical segment reported a 7% increase in earnings. We think earnings from this division should remain profitable but will decline gradually as refining margins revert to historical norms.

The worst performer for the firm is the marketing division, which reported an operating loss of CNY 6.5 billion in 2018 from profit of CNY 8.3 billion in 2017, owing to an oversupplied market and intense competition. We anticipate that this segment will remain the weakest link to the firm, given that competition is unlikely to subside in the near term.

Meanwhile, the firm plans to increase capital expenditure by 17% to CNY 300.6 billion in 2019, about 30% higher than our expectation, mainly due to a jump in spending in exploration and production (to increase oil and gas output) and refining and chemicals (for construction of large-scale refining and chemical projects) segments.