PetroChina’s Strong First-Half 2022 Earnings Underpinned by Robust Oil Prices

Senior Equity Analyst

Chokwai Lee

PetroChina is the listed arm of one of China's two integrated oil majors and the largest oil producer. With revenue and assets more heavily weighted toward the upstream activities, PetroChina is more sensitive to swings in the oil price than its peer, Sinopec. In addition, the firm’s downstream operations lag Sinopec, which has better scale and efficiency in the sector. However, PetroChina will benefit more in a rising oil price environment.

While we believe government restrictions on domestic exploration by foreign firms have given PetroChina a clear advantage when securing oil and gas reserves in China, the lack of large discoveries and the structural decline in legacy oilfields have led to a decline in total reserve life to about 11 years in 2021 from about 17 years in 2012. As a result, the company is forced to secure resources overseas. It is common practice for China National Petroleum Corporation, or CNPC, PetroChina’s parent, to acquire, develop, and inject high-quality projects into PetroChina at below-market prices. As CNPC buys up assets in South America, Central Asia, and Africa, we expect it to drop down some of these projects when they mature.

Being a state-owned monopoly has hurt the firm financially, as it is obligated to import natural gas at a higher cost than it can sell it for. Consequently, margins at PetroChina’s natural gas pipeline segment suffer when prices rise. As China shifts its focus away from subsidizing the industrial sectors toward encouraging private consumption and reducing pollution, reforms should allow prices to move more closely with international benchmarks. We expect the continued roll out of natural gas pricing reform to help PetroChina stage a gradual margin recovery.

Business Strategy & Outlook

We still see PetroChina as having no moat because its asset base is not capable of consistently delivering excess returns in the next 10 years at our midcycle Brent oil price assumption of USD 60 per barrel. At this oil price level, we see PetroChina’s midcycle return on invested capital as shy of the weighted average cost of capital. PetroChina’s key onshore oil field, Daqing, is depleting and seeing diminishing returns. The company's reserve life has also declined to about 11 years in 2021 from 18 years in 2010, and a large part of its proven and undeveloped reserves is trapped in low-permeability and deeper reservoirs that would make it costlier to develop.

We see no moat in the firm’s refining and marketing business. Petroleum and petrochemical refining operations are a fragmented, capital-intensive, and highly competitive global business. In addition to major inputs and outputs of refineries being globally traded commodities, PetroChina's downstream business does not have access to a low-cost source of crude, nor does it enjoy a meaningful transport cost advantage compared with peer Sinopec. In addition, the government’s intention to create a fully deregulated market will also introduce more competition.

Beyond its exploration and production operations, PetroChina’s natural gas and pipeline segment owns and operates crude oil and natural gas distribution and pipeline network in China. We tend to view pipelines as wide-moat assets because of their efficient scale. This enables PetroChina to transport oil and gas at the lowest total cost and capture additional economic rents in the supply chain. However, being a state-owned monopoly, it is obligated to import natural gas at a higher cost than it can sell it for. Consequently, PetroChina’s natural gas and pipeline segment continues to incur loss from its imported gas business. Further, the government is regulating the returns for transmission pipeline owners, and we do not expect the segment as a whole to generate substantial economic profit in the long term.

Material environmental, social, and governance, or ESG, exposures also create additional risks for oil and gas producers, including carbon emissions in their operations, use of their products, and emissions, effluents, and waste generated in operations. In particular, the risk from carbon emissions is most likely to materialize through some form of carbon pricing, which can increase the price of end products to consumers and reduce demand for oil and gas over time. In addition, the ongoing low-carbon trends (such as the gradual transition to lower-emitting fuels) could eventually lower demand for oil and gas. We expect carbon taxes to gain greater adoption over time but think the impact on hydrocarbon demand remains more than a decade away.

We note that China’s three national oil companies (CNOOC, PetroChina and Sinopec) are trying to manage these risks through low-carbon business strategies, such as focusing more on gas production, renewable energy, and alternative fuels such as hydrogen. However, details remain scant on these strategies and there is no evidence that the low-carbon businesses will grow meaningfully in the near term. Furthermore, as China is a net importer of oil and gas, we think it will be challenging for the three national oil companies to significantly cut exposures rapidly, given their roles in the country’s energy security.

None

Economic Moat

PetroChina Company Ltd.

PetroChina Co. Ltd. engages in the petroleum related products, services and activities. It operates through the following business segments: Exploration and Production; Refining and Chemicals; Marketing; Natural Gas and Pipeline; and Head Office and Other. The Exploration and Production segment involves exploration, development, production, and marketing of crude oil and natural gas. The Refining and Chemicals segment focuses on the refining of crude oil and petroleum products, production and marketing of primary petrochemical products, derivative petrochemical products, and other chemical products. The Marketing segment includes marketing of refined products and the trading business. The Natural Gas and Pipeline segment comprises transmission of natural gas, crude oil, and refined products and the sale of natural gas. The Head Office and Other segment relates to cash management and financing activities, the corporate center, research and development, and other business services supporting the operating business segments of the Group. The company was founded on November 5, 1999 and is headquartered in Beijing, China.

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BEIJING, CHINA / ACCESSWIRE / October 27, 2022 / PetroChina Company Limited ("PetroChina" or the "Company", HKSE: 00857; SSE: 601857) announced that in the first three quarters of 2022, despite complex and severe external environment, the Company overcame the challenges arising from lower crude oil demand and natural disasters such as flooding. Coordinated efforts were made to maintain stable production and operations, promote business reform and innovation, and respond to COVID-19.

Continuous Optimization of Oil and Gas Industrial Chain to Ensure Safe and Stable Supply of Oil and Gas Resources Petrochina's Operating Results Improved Steadily in The First Three Quarters Of 2022

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PetroChina Company Limited (PTR) Q2 2022 Earnings Call Transcript

BEIJING, CHINA / ACCESSWIRE / August 25, 2022 / PetroChina Company Limited ["PetroChina" or the "Company", (SEHK:0857)(NYSE:PTR)(SSE:601857)] announced that the Company delivered record first half operating performance in 1H2022, underpinned by solid progress in production and operation, sustained efforts in promoting high quality development, as well as smooth and efficient operation of its oil and gas industrial chains. According to IFRS, the Company achieved a revenue of RMB 1.6 trillion in 1H 2022, and a net profit attributable to owners of the Company of RMB 82.39 billion.

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