1Q17 net profit declines 7% QoQ
PetroChina reported 1Q17 net profit decline of 7% QoQ to RMB5.7bn or EPS ofRMB0.03, turning around from a loss of RMB13.8bn in 1Q16 and tracking at13% of FY17E consensus. The reported profit was in line with guidance, butmixed in operating results. On a QoQ basis, pipeline and refining & chemicalssegments shone on higher gas prices, better product spreads and highervolume, while E&P and marketing segments gloomed on lower oil outputs andrefined product sales. With an expected oil price recovery, execution andstringent cost controls will likely be key to E&P success ahead.
Mixed bag 1Q17: E&P and Marketing gloomy; R&C and Gas Pipelines shone
E&P: Segment profit declined by 73% QoQ to RMB1.9bn even though oil ASPhiked by USD6.5/bbl, while gas ASP rose by 8% QoQ to RMB1.2/cm on a fullquarter of winter gas prices, which ended only in late-March. PetroChina hasachieved a 3% QoQ reduction in all-in cost at USD46/boe by lowering outputsfrom high-cost oilfields, which have resulted in a 3% oil output decline QoQ.Offset by a 6% QoQ gas production growth, overall oil & gas output was mildlyup by 1% QoQ to 366.8mnboe in 1Q17, in line with 17E guidance. With unitprofitability improving by c.USD6/boe QoQ, the RMB5.2bn reduction insegment profit was strange. This could be due to a potential trading loss incrude oil or inter-segmental adjustment, in our view.
R&C: Segment profit rose by 73% QoQ to RMB8.2bn. Downstream profitabilitycontinues to improve in the start of 2017 despite the rising oil prices. RefiningEBIT/bbl was +94% QoQ at USD2.2/bbl but fell by 70% YoY to US$2.2/bblwithout windfall profits from refined floor prices. The strong QoQ improvementwas due to: 1) GRM improvement from the nationwide fuel standard upgradesto GB-V, 2) a decline in the diesel-to-gasoline production ratio to 1.32 vs. 1.38in 4Q16, and 3) the lack of asset impairments. On the chemicals side,operating profit rose 57% QoQ and 44% YoY driven by the strong chemicalsspreads, where Asia ethylene spread has surged 18% QoQ. In particular,chemicals EBIT per ton has improved by RMB1,184/t QoQ. This is coupled with12% QoQ output growth in synthetic fiber monomers & polymers, while othermajor products such as ethylene & synthetic resins stayed largely flat.
Marketing: Segment profit declined by 31% QoQ to RMB2.9bn as refinedproduct sales slowed under fierce competition. Gasoline sales managed tomaintain 2% QoQ growth, but this has failed to offset the 7% and 11% QoQdecline in diesel and kerosene sales.
Gas pipeline: Segment profit reached RMB9.9bn in 1Q17 vs. RMB28mn in4Q16. With the imported gas loss widening by 39% QoQ to RMB6.0bn, thisimplies domestic gas sales have been very profitable in 1Q17.
Valuation
We value PetroChina using SOTP, valuing upstream and gas pipelines withDCF (8.5% WACC and 2% terminal growth) and downstream with P/B vs. ROE,to which we apply 1.6x/0.5x target 17E P/B on ROEs of 13.9%/4.7% for refining& chemicals and marketing segments.