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Morningstar | PetroChina’s 3Q Results Beat Expectation on Higher Oil Prices; Raising FVE to HKD 6.10

No-moat PetroChina’s cumulative nine months net profit of CNY 48.1 billion, up 177% year over year, was above market and our expectations. In particular, third-quarter earnings rose 24% quarter over quarter, largely attributable to higher oil and gas prices, and better performance of refining and chemicals segment. After incorporating our latest oil price forecasts and U.S. dollar exchange rate assumptions, we increase our fair value estimate to HKD 6.10 per share (USD 79 per ADR) from HKD 5.80 (USD 74). We also introduce our A-shares fair value estimate of CNY 5.50. Our midcycle Brent oil price forecast is unchanged at USD 60 per barrel and we think the firm is fairly valued as strength in near-term oil prices has been priced in. Meanwhile, PetroChina’s H-shares offers decent dividend yield of about 4.4% at current price.

PetroChina’s first nine months oil and gas output for the exploration and production segment is in line with our forecast, rising 2.2% year over year to 1,107 million barrels of oil equivalent. Operating profit improved significantly to CNY 57.9 billion from CNY 11.0 billion a year ago, mainly owing to higher average oil and gas selling prices, which rose 39% and 13% respectively, to USD 67.93 per barrel and USD 5.72 per thousand cubic feet. Despite rising oil prices, management is able to keep costs in check, with lifting cost falling 3.0% year over year to USD 11.47 per barrel, excluding foreign exchange impact.

Meanwhile, earnings from the refining & chemicals division surged 32% year over year to CNY 36.6 billion, with higher refining profit offset by lower contribution from chemicals operations on the back of plant maintenance and lower margin. We note that earnings from this division fell 9% quarter over quarter and we expect the trend to remain going forward with the absence of inventory gains and normalizing refining margins.

The natural gas and pipeline segment saw operating profit increasing 9% year over year to CNY 19.7 billion, aided by higher natural gas selling prices and sales volume. In particular, net loss from imported gas and LNG decreased by 14% quarter over quarter to CNY 6.5 billion, likely due to higher residential city-gate prices, which came into effect in June. We think the loss should narrow further in the fourth quarter as the firm is able to raise gas prices during the coming winter.
While marketing segment’s operating profit was up 12% year over year to CNY 6.4 billion, earnings fell 26% quarter over quarter due to the oversupply market and intense competition in the refined products market. As such, we think this division will remain the underperformer in the near term.
PetroChina’s capital expenditure rose 19% year over year to CNY 148.1 billion for the first three quarters, tracking 64% of the firm’s full-year target. We keep our estimate unchanged as we expect this to pick-up in fourth quarter, in line with historical trend.