1H16 post results NDR in HK; maintaining Buy with TP of HKD6.42/sh
Most of the discussions on the NDR were centered around the restructuring ofPTR's pipelines, tariff reform and cost cuts. PTR has no timeline on the furtherselldown or even IPO of its pipeline company but further capital raising to fundthe construction of its China-Russia pipeline seems to be the direction. PTRwas not worried about potential transmission tariff cuts as the benefits ofhigher gas demand will outweigh those of reduced tariffs. The pace of liftingcost cuts (down 10% yoy in 1H16) should stick for the full year but furtherlifting cost cuts appear limited. The E&P segment should return to profitabilityin 2H from an RMB27bn loss in 1H so PTR is leveraged to a recovery in oil.
Positive FCF on prudent cash uses in 1H16; further upsides as oil price stabilizes
In 1H16, PTR posted free cash flow of RMB61bn despite the oil price plunge.Particularly, capex was controlled at RMB51bn (-17% YoY), representing just26% of its FY16 guidance. PTR is committed to allocating >75% of its capexinto E&P, which is critical for sustainability. Meanwhile, PTR delayed all itsrefining expansions, except its Yunnan Refinery. We believe PTR's prudentcash management will continue to improve its cash flows as the oil pricestabilizes. Nevertheless, in addition to its long-standing 45% dividend payout,management did indicate that they may consider another special dividendduring its final results, as they did in the 1H16 results.
Expecting no further gas price cuts; transmission tariff reform could be positive
With oil prices now recovering to the Nov-15 level, PTR no longer expectsNDRC to cut the city-gate gas price. In view of the recent transmission tariffreform on long-distance gas pipelines, PTR believes it will be immune, as anyimpact on the tariff would be absorbed in E&P’s intersegment revenue, as longas the city-gate gas price remains unchanged. Instead, PTR expects to benefitfrom further tariff reforms on downstream gas distribution which couldstimulate demand further. Regarding the Central Asia Pipeline disposalcompleted in 1H16, half of the RMB24.5bn EBIT gains on disposal wereattributed to minority interests, as CNPC held 50% of the consolidated assets.Hence MI’s profits jumped to RMB16.4bn in 1H16.
Valuation and risks
We maintain our Buy rating on PTR as we expect oil prices to trend higher in2H16 and 2017. Currently, PTR’s share price is pricing in Strip+ USD15.9/bbl(USD67.2/bbl). We derive our target price with SOTP, valuing E&P with DCF(WACC: 8.9%, terminal growth: 2%) and downstream segments with P/B vs.ROE. Risks: volatile oil & gas prices, unexpected regulatory changes.