We attended PetroChina's Corporate Day on Apr 6-7. PTR has also issued aprofit alert after the market close on Apr 7, stating that its 1Q17 earnings havereturned to net profits of RMB5-6bn or RMB0.027-0.033/sh from a loss ofRMB13.8bn in 1Q16. We believe this was in-line with expectations given itsE&P has returned profitable with the oil price recovery since 4Q16, vs. EBITloss of RMB20.3bn in 1Q16. Key takeaways from corporate day are as follows.
Gas pipeline: Lower tariffs offset by gov support to boost gas consumption
Based on the previous tariff framework, PTR has yielded ROI of 8.2% on its gaspipelines in FY16. Management expects to switch to the new tariff frameworkin Jun-17 which could lower its pipeline tariffs. However, a higher gas demandwill likely offset the potential tariff cuts as more favorable policies are expectedto support gas power generation in the future. PTR noted the solid gas demandin 1Q17, up c.10% yoy despite a warm winter. It expects gas demand to reach280-320bcm in 2020 (4yr CAGR of 8.6-12.3%) as driven by city gas, industrialfuel and power generation growth, which will likely account for 37/32/22% of2020 gas demand (vs. 41/29/17% in 2016). On gas imports in FY16, gas fromMyanmar saw the largest net loss at -RMB1.3/cm+ vs. -RMB1/cm for CentralAsia and -RMB1.2/cm for LNG. In 2017, PTR will cut Myanmar gas imports by20% yoy, while adding Central Asia imports by 5bcm and LNG from Australiaby 1bcm. Although gas import costs could rise with the oil price in 2017, thisshould be offset by a higher gas price since 4Q16. After PetroChina PipelineCompany (72.26% stake) was set up in 2015, all pipelines directly or indirectlyheld by PTR are now centrally managed by the Pipeline Company. The PipelineCompany will also start constructing China-Russia Pipeline in 2017. While PTRcurrently has no plans to get the Pipeline Company listed, it does not rule outthe possibilities of further consolidating its remaining pipelines.
Price reform: Gas price reform likely to be launched in 2H17
Currently, residential and industrial gas prices are already consolidated inGuangdong and Guangxi, but further consolidation in other parts of China willtake time. Management expects the natural gas price liberalization to continueand a new gas pricing framework to be launched in 2H17. Indeed, since the±20% floating range was allowed on non-residential gas price and the fertilizergas price was liberalized in Nov-16, gas prices have effectively been liberalizedwhere NDRC guidance prices serve more as a reference with the listed priceson SHPGX. Meanwhile, management noted a continued government supporton its long-term gas import obligations, evidenced by which NDRC has cut gasprices by RMB0.7/cm only in Nov-15 instead of RMB1/cm based on formula.
Refining & Chemicals: PDVSA’s Integrated JV Project resumed
Management expects further price liberalization on refined products is possiblebut will not happen in 2017. In a shorter run, PTR believes the government willlift GB-VI fuel prices to allow appropriate returns on the refineries’ investmentfor machine upgrades, where total cost is estimated to +RMB300/t for gasolineand +RMB200/t for diesel. PTR has resumed PDVSA’s JV with partnership onupstream oilfields (40%), a 20mt refinery in Jieyang (60%) and downstreamproject (50%). This will complete its mid-term refinery portfolio at 210mt. PTRtargets to lower diesel-gasoline ratio to 1.35 (1.4 in FY16) with 5.7mt ethyleneoutputs (+2% yoy) in 2017; it plans to cut diesel-gasoline ratio to 1.2 by 2020.