Consensus earnings upgrades likely for 2017
We believe PetroChina's share price under-performance versus peers has been overlydramatic the last 2 years and believe its gas assets may be undervalued by the market.Our global oil team reiterates a US$60/bbl Brent forecast for 17E, which is US$4-5/bblabove the consensus. However, we lower our 18-19E forecasts to US$65-70/bbl fromUS$70-75/bbl, in each year, respectively. The 7% cut to our long-term oil price forecastcomes on the back of our view that some of the industry cost cuts the last two yearswill be structural and also due to better anticipated shale oil production in the US. Weraise our 17E EPS forecast by 35% to Rmb0.34/sh on lower E&P cost and betterrefining and chemical performance. We cut our 2018-2019 EPS forecasts by 4-11%.
Rising oil prices and capex constraint should boost free cash flow
We have also lowered our capex forecasts. We expect PetroChina to reduce its 2016capex by 15-20% versus management guidance for around a 10% cut. We have alsolowered our capex forecasts for 2017 – 2018 by about 15-16%, which is equal to areduction of US$5-6bn in each year, respectively. We anticipate rising oil prices andcapex constraint will lead to stronger free cash flow and finally de-leveraging ofPetroChina's balance sheet. PetroChina's net gearing went from near zero in 2007 toabout 40% from 2013-2015. We forecast a drop to around 15-20% by 2018-2019.
China's gas giant has 60% of reserves in natural gas
As highlighted in our Gas is back in China note, we believe investors were discouragedby developments in China's gas markets the last 2-3 years. Disappointing gas demandgrowth of 8-9% in 2014 was followed by just 2-3% demand growth in 2015.Furthermore, concerns lingered amidst an apparent glut of large long-term LNG andpipeline import contracts. Now we believe China's upstream gas industry has troughed.The process will be gradual, but we believe more market-oriented pricing, reform ofdownstream pipeline tariffs, direct government stimulus, and higher alternative fuelprices (diesel, LPG, fuel oil, coal) should gradually benefit upstream gas prices.
Valuation: Price target HK$7.9/sh
While we lowered our long-term oil price view, we also lowered our cost expectationsand rolled our net debt forward to end 2017 to reflect a de-levering balance sheet. Weuse an NAV methodology (30% discount) to determine our price target (2P reserves atBrent US$70/bbl, 10% WACC) (downstream oil and gas assets at 6-9x 17E EV/EBITDA).