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Morningstar | PetroChina’s First-Half 2018 Results In Line With Preliminary Guidance; Shares Fully Valued

No-moat PetroChina’s first-half 2018 net profit more than doubled from a year ago to CNY 27.1 billion. The strong results were within preliminary guidance given in July and broadly in line with our expectations. After updating our valuation model to incorporate our latest Brent oil prices and U.S. dollar exchange-rate assumptions, our fair value estimate is unchanged at HKD 5.80 (USD 74 per ADR). We think the firm is fairly valued currently. While PetroChina has increased its interim dividend (including special dividend) by 28% year over year to CNY 0.0888 per share, its annualized yield of less than 4% trails its peers, which are paying more than 5% yield.

The firm’s exploration and production segment reported an operating profit of CNY 29.9 billion versus CNY 6.9 billion a year ago, mainly owing to higher average oil and gas selling prices, which rose 32% and 18%, respectively, to USD 65.81 per barrel and CNY 1,407 per thousand cubic meters. Meanwhile, management continues to keep costs under control, with lifting cost declining 1.8% year over year to USD 11.49 per barrel, excluding foreign exchange impact. PetroChina's output in the first half at 736.3 million barrels of oil equivalent, up 1.5% year over year, is on track to achieve our full-year estimate.

On the other hand, earnings from the refining and chemicals division surged 47% year over year to CNY 23.2 billion, helped in part by mark-to-market inventory gains. Refining margins remained high, similar to Sinopec, helping to offset weaker chemical segment earnings, which were affected by increased raw materials cost and plant maintenance. Given that the higher earnings partly stem from inventory gains, we anticipate earnings will gradually fall as refining margins normalize.

The natural gas and pipeline segment reported operating profit of CNY 16.1 billion, up 16% year over year, benefiting from higher natural gas selling prices and sales volume. However, net loss from imported gas and LNG increased by CNY 1.6 billion to CNY 13.4 billion due to stronger natural gas demand. While we believe the firm will still record a loss for imported gas and LNG, we think it should narrow going forward, as price hikes for downstream gas sales during the coming winter should help.

In contrast to other, better-performing segments, the marketing segment’s operating profit was down 21% year over year to CNY 4.5 billion due to intense market competition. We think the outlook will remain challenging for this division in the near term, as the market is still oversupplied.

PetroChina’s capital expenditure was CNY 74.6 billion in first-half 2018, up 20% year over year, mainly allocated to exploration and production. The spending is only at 32% of the firm’s full-year target, but this should pick up in the second half, in line with historical trends.