PetroChina reported 3Q16 NP of RMB1.2bn or RMB0.01/sh （-77% YoY/-92%QoQ）， below our expectation. The 9M16 result tracks 10%/18% ofDBe/consensus 2016E EPS. Despite earnings downside, we expect earningsmomentum to build in 4Q16, supported by a potential gas price hike from 20November. On a QoQ basis, E&P shone on sustained cost cutting and is closeto breakeven, with an EBIT loss of US$0.6/boe vs. US$2.9/boe in 2Q. Refining& chemicals fell, with no significant inventory gains and a slight margin drop.
　　Marketing fell on a narrowing spread, with fierce competition despite a refinedoil sales increase. Gas pipeline was dragged by a QoQ widening of import loss.
　　3Q16 results summary by segment below:
　　E&P: The segment's profit rose by RMB5.2bn and reached -RMB1.5bn vs. aloss of -RMB6.7bn in 2Q16 （excluding one-off disposal gains）。 Cost-cuttingefforts continue to pay off, with stringent all-in cost control of -4% QoQ;however, lifting costs were flat. The realized oil & gas price was flat QoQ atUSD35.6/bbl as the RMB0.14/cm realized gas price cut was offset by a 5%increase in the realized oil price. 3Q crude oil production declined 8% YoY and1% QoQ to 226mmbbl, while the gas volume was up 3% YoY but down 1%QoQ to 764bcf. Within this, domestic oil and gas production posted mild QoQdeclines of 0.6% and 0.3%, respectively.
　　Refining & chemicals: The segment's profit registered at RMB6.8bn, down47% QoQ vs. -RMB1.5bn in 3Q15. The QoQ decline was due to no inventorygains in 3Q coupled with narrowed refining and chemicals margins. In 3Q16,per-unit refining and ethylene EBIT were trimmed by 55% and 9%,respectively, to US$2.9/bbl and RMB1,911/t. Refining throughput fell 5% QoQand 9% YoY at 225mmbbl （tracking 72% of the FY16E target）， while thediesel/gasoline ratio remained flat QoQ at 1.4. We expect the refining segmentto improve in 4Q with: 1） the potential for inventory gains, 2） a recovery ingasoline and diesel spreads, and 3） a diesel demand recovery due to coldweather and the implementation of the transportation overloading law.
　　Marketing: The segment's profit reached RMB2.2bn, down 48% QoQ vs.
　　-RMB3.8bn in 3Q15. The QoQ profit decline was pressured by slowed refinedproducts consumption growth and intensified competition with the ramping-upof teapot refineries. Major oil product sales posted QoQ and YoY growth. Inparticular, diesel achieved 8% QoQ/ 5% YoY sales growth in 3Q16 （vs. -5% YoYin 9M16）， despite its weak demand growth YTD. Gasoline sales growthaccelerated in 3Q at 9% QoQ and 5% YoY （vs. 2% YoY in 9M16）。
　　Natural gas & pipeline: The segment's profit reached RMB6.4bn, down 4%QoQ and 39% YoY. Specifically, the gas import loss has widened by 32% QoQand 124% YoY to RMB2.6bn. This was offset by a 4% QoQ improvement （but a23% YoY decline） in domestic pipeline gas sales.
　　Cash flow: PetroChina continues to be a cash cow, improving its 3Q16 FCF by140% QoQ to RMB47bn vs. capex of RMB32bn （+3% QoQ）。 9M16 capexregistered at RMB114bn, tracking 59% of FY16E guidance.