FY16 EPS -78% yoy to RMB0.04, in line with Deutsche Bank, Street estimates
　　PetroChina announced FY16 NP at RMB7.9bn, or EPS of RMB0.04 （-78% yoy），in line with expectations. Refining and chemicals EBIT has markedly improvedto RMB39bn from RMB4.9bn in FY15, owing to the refined oil price floor,inventory gains, and better chemicals margins. Marketing also returned topositive EBIT of RMB11bn from a RMB0.5bn loss in FY15. While a 20%+ yoydecline in oil and gas prices hit E&P heavily in FY16 with an ex one-off EBITloss of RMB21.4bn, it turned profitable in 4Q16. Looking ahead, withmanagement expecting a RMB20bn+ yoy rise in 1Q17 E&P profits, PetroChinawill likely continue to ride on the oil price recovery. We reiterate Buy.
　　2017 outlook: Capex to rise from RMB172.4bn to RMB191.3bn, up 11% yoy
After missing last year’s capex target of RMB200bn by 14%, PTR is guiding foran 11% increase in capex in 2017. As with previous years, 75% of PTR’s capexwill be devoted to the E&P segment. However, capex cuts in previous yearsmean 2017 oil and gas production will likely decline by 2.5% yoy, with crude -4.5% yoy and gas +1% yoy in 2017E. In 2016, PTR saw O&G output decline by1.9% yoy, with crude down 5.3% yoy and gas up 4.6% yoy, so output woulddecline for two consecutive years for PTR. On refining and chemicals, capex isexpected to grow by 6% yoy in 2017. PTR is targeting refinery throughputsrebounding to 6.7% yoy after being down by 4.5% yoy last year.
　　Updates on gas pipeline: FY16 recurring EBIT -37% yoy; more reforms ahead
Segment results: Pipeline EBIT was down 37% yoy to RMB17.9bn （excludingone-offs） in FY16, while gas import loss narrowed by RMB1.5bn; the drop wasdriven by gross profit decreases in domestic gas sales and transmissiondespite achieving 16% sales volume growth in FY16. In addition, PetroChinahas started construction for the East section of the China-Russia gas pipelineand Shaanjin pipeline 4.
　　Reform: PetroChina expects that the domestic gas pricing mechanism willbecome market driven, similar to pilot testing in Fujian province, based onarm’s-length negotiation between supplier and consumer. On transmissiontariffs, the company has conducted audits for various pipelines and submittedthem to the government, but no time line has been disclosed for potential tariffadjustments. Conversely, for long-term LNG contracts, PetroChina has openedup discussions with suppliers to renegotiate the LNG pricing structure; thecompany believes that, in one to two years, global LNG will reach oversupply,which favors PetroChina for adjustment negotiation.
　　Valuation and risks
　　We value PetroChina with a sum-of-the parts method, valuing upstream withDCF （8.5% WACC and 2% terminal growth） and downstream with P/B vs. ROE,in which we apply 1.6x and 0.5x target 17E P/B on ROEs of 13.9% and 4.7% inthe refining & chemical and marketing segments, respectively, in 2017E. Ourtarget price implies 0.9x 2017E P/B （-1SD to 10-year average of 1.5x） and 5.5x2017E EV/EBITDA （-0.5SD to 10-year average of 5.8x）。 Risks: lower-thanexpectedoil and gas prices, regulatory changes/refined product pricing policychanges, delays on SOE reform, and unexpected cost inflation.