Field Trip Recap
We visited PetroChina’s shale operations in Changning and Weiyuan,Sichuan Province, and came away bullish on its shale outlook.
Key takeaways
Production to quadruple by 2020. Shale output was just over 3bcmin Changning and Weiyuan in 2017. The company says it canquadruple it to 12bcm by 2020 by drilling 790 wells between now and2020, with over 300 in the Changning area and the rest in Weiyuan.
Per well cost contained to Rmb55mn. Excluding exploration fees, allin cost has been reduced to Rmb55mn on a per well basis: Rmb50mnabove ground and Rmb5mn underground. This is lower thanSinopec’s Rmb60mn all-in cost in Fuling shale, and mainly due toparent subsidies, since PetroChina’s drilling work has been primarilyoutsourced to the CNPC oilfield service team.
Decent margins. At the wellhead level, ASP is Rmb1.26/m3 excludinga government subsidy of Rmb0.3/m3, while all-in cost on averagestands at Rmb1.0/m3, with some wells hitting as low as Rmb0.9/m3.Although margins cannot compare to those of conventional gas wellsin the Tarim Basin （Rmb0.4/m3 all-in cost）， overall it is quite decent.
Similar depletion rate with US shale. The sharp depletion rates at itsshale wells are similar to US levels, with 60% at year two and another50% at year 3, by when output is only 20% of the first-year level.
Gas storage in Chongqing. We also visited PetroChina’s gas storagestation in Chongqing, the largest storage facility in China in terms ofcapacity. Current cost stands at Rmb0.28/m3 on the way in, andRmb0.24/m3 on the way out. On a standalone basis, the storage itselfis not profitable and is mainly used for peak-shaving, but goingforward, the company pledges to buy in more gas off-peak, and sell ata mark-up during the winter peak season to grab a higher margin.
Recommendation
Keep 2018 & 2019 EPS forecasts unchanged. PetroChina-H is tradingat 16x 2018e or 14x 2019e P/E. We maintain a HK$7.60 TP based onSOTP with 27% upside. Maintain BUY.
Risks
Oil price; shale depletion rate faster than expected