BMI View : PetroChina's Q312 performance continues to be constrained by a sluggish downstream segment and the continued decline in its natural gas and pipeline business - trends that we ha d already identified last quarter s . What is striking about the company's latest quarterly performance is the adverse effect of higher operating costs on its profits, which have fallen in the lucrative upstream segment despite higher output levels and average realised prices.
PetroChina ' s Q312 performance continues to be constrained by a sluggish downstream segment and the decline in its natural gas and pipeline (natgas) business . Meanwhile increase d upstream expenses ha ve negated continued growth in its oil and gas output. Net profit for the quarter was CNY29.2 4 bn (US$4.67bn) .
|Little Cheer For Q312|
|PetroChina's Q312 Performance (CNYmn)|
This was equivalent to a 13% quarter-on-quarter (q-o-q) rise in profit. However, it was still not enough to avoid an 8.7% year-on-year (y-o-y) fall in net profit for the first nine months of 2012.
|9M12 (CNY)||9M11 (CNY)||Change|
|Exploration And Production||163,293||160,791||1.6%|
|Refining and Chemicals||- 37,398||- 38,403||-2.6%|
|Natural Gas and Pipelines||885||13,233||-93.3%|
|Others||- 8,626||- 11,251||-23.3%|
Revenue from operations actua lly rose relative to Q112, but net profits in Q312 were lower. It appears that in Q3 PetroChina fell victim to rising costs.
|Operating Costs Eat Into Income|
|Comparison Of Quarterly Revenue & Profit (CNYmn)|
Expenses Dilute Upstream Gains
Much of this rise in revenue can be attributed to gains in the upstream segment. Crude oil production continues to grow, rising 2.4% relative to Q212 , while a n 18% increase in the realised price of oil in Q3 further boost ed already healthy oil output. Natural gas production registered a smaller rise , from 16.3bn cubic metres (bcm) in Q212 to 16.4bcm in Q312 , which was also accompanied by a 2% increase in the realised price of gas.
|Liquids Expand In Q3|
|Quarterly Lifting Of Crude Oil (LHS; in mn bbl) & Natural Gas (RHS; in bcm)|
|*Figures are calculated at an exchange rate of US$1=CNY6.35. Source: PetroChina|
|Oil (per bbl)||103.62||85.00||105.48|
|Gas (per '000 cubic metres)||179.29||175.05||173.93|
Despite a relatively healthy production profile, quarterly profits fo r exploration and production ( E&P ) fell 7% relative to Q212 - point ing to an increase in operating expenses. This excludes expenditure on exploration, which fell q-o-q from C NY8.20bn (US$1.32bn) to CNY4.00bn (US$642mn) in Q312, and taxes.
|Counting The Cost|
|PetroChina's Quarterly Upstream Performance (CNYmn)|
A y-o-y comparison for the first nine months of the operating year still shows that PetroChina registered a 1.6% rise in operating profits in its upstream business. Nonetheless, we flag that strong output growth- which continues to be driven by overseas projects- could be squeezed because of rising costs. This is a problem that PetroChina will need to overcome, given that its upstream segment is the biggest contributor to overall growth. A stronger CNY against the US$ could, however, lead to some currency gains and offer some respite - negating the effects of cost increases.
Cutting Downstream Losses
PetroChina cut its downstream losses by 52.8% this quarter - to the lowest level in three quarters. This development mirrors a general mood which has settled across the global refining sector, which benefited from a supply crunch in the fuels market even as they benefited from processing lower-priced crude feedstock that had been ordered in late Q212.
|Narrowing Of Losses|
|Quarterly Refining & Chemicals Segment Performance (CNYmn)|
For PetroChina, the state's upward revision of fuel prices in mid-August has further benefited the company's China-dependent downstream business. The revision has allowed the company to sell products refined from lower-priced crude input (due to the delivery time lag) at a higher price, thereby cutting PetroChina's refining losses in what is a heavily regulated environment.
As with other international companies, any improvement in PetroChina's refining business could be temporary. PetroChina does not provide a breakdown of profits from its refining and petrochemicals divisions but we expect that much of the downstream growth posted in Q312 came from the former, owing to the unique confluence of the above-stated factors. Industrial activity, which drives petrochemicals performance, is unlikely to have provided such support, given weak demand over the quarter (see our online service, 'Recession Is Here, And Stimulus Won't Help', September 3 2012, and 'Manufacturing Contracts For 11 th Straight Month', September 21).
In the short-term, we note that PetroChina's downstream losses could narrow, if the global refined fuels market remains tight and weak domestic demand to allow it to utilise capacity for exports.
A recent International Energy Agency (IEA) report stated that the rapid growth in China's refining capacity could transform it into a net exporter in the future, and signs of such a change are emerging. According to Reuters, China is expected to have exported diesel in October - an unusual activity at this time of the year (see 'Imports: Temporary Pick-Up Ahead', November 8). As one of the major refiners in China, exports to the more lucrative global market could help PetroChina control domestic losses.
Natural Gas Business Sinks Further Into The Red
As expected, PetroChina's natural gas and pipeline business (natgas) - serving the Chinese market - continues to suffer under the weight of domestic gas price regulations, even as the country's consumption of natural gas increases.
|Regulation And Spiralling Demand Bleeds Natgas|
|Natgas Segment Quarterly Performance To Date (CNYmn)|
According to our estimates, China's gas consumption will rise at least 13% y-o-y in 2012, while gas production is only expected to have risen 6.7% y-o-y.
|Bearing The Cost Of Gas Imports|
|China's Gas Consumption & Production, 2011-2021 (bcm)|
This increasingly leaves natural gas wholesalers such as PetroChina, Sinopec and China National Offshore Oil Corporation (CNC) to bear the difference between the cost of gas imports and domestic gas prices, something that is reflected in PetroChina's natgas results.
One upside risk that could ease future natgas losses is the National Development and Reform Commission (NDRC)'s promise to implement gas price reform. This could lead to better linkage between gas production and consumption, a seasonal pricing scheme and a nationwide implementation of a pilot programme to link domestic gas prices to imported fuel.
Price reforms are crucial if the bottom line in the natgas segment is to improve. However, given the NDRC's dalliances with promised fuel price reform in the past, we are not optimistic that changes will be introduced in the near future, as this would not be a popular move politically.