Chinese energy giant PetroChina Co. Ltd. (PTR) announced its third quarter 2011 earnings of RMB 37.4 billion or RMB 0.20 per diluted share, compared with RMB 34.7 billion or RMB 0.19 per diluted share in the year-earlier period. Earnings per ADR came in at $3.13 (exchange rate: US$1.00 = RMB 6.39, 1 ADR = 100 shares).
The slight improvement can be primarily attributable to higher energy prices and stronger volumes, which were almost offset by refining losses. PetroChina’s total revenue for the three months totaled RMB 530.7 billion, an increase of 46.1% from the year-earlier period.
Segmental Performance
Upstream: PetroChina, the world's most valuable oil and gas producer after ExxonMobil Corp. (XOM), posted strong upstream output growth during the nine months ended September 30, 2011. Crude oil output rose 4.8% from the year-ago period to 670.1 million barrels (MMBbl), while marketable natural gas output was up 5.9% to 1,734.8 billion cubic feet (Bcf).
Average realized crude oil price during the first nine months of 2011 was $103.78 per barrel, representing an increase of 44.6% from $71.76 per barrel in the corresponding period of the previous year. Average realized natural gas price was $4.76 per thousand cubic feet (Mcf), 27.3% above the year ago level of US$3.74. This pushed up the upstream (or exploration & production) segment profit by 40.4% to RMB 160.8 billion.
Downstream: PetroChina’s refinery division processed 725.2 MMBbl during the nine-month period, up from 657.4 MMBbl in 2010. The company produced 4.194 million tons of synthetic resin in the period (a rise of 3.4% year over year), besides manufacturing 2.561 million tons of ethylene (down 4.2% from the first nine months of 2010). It also produced 64.302 million tons of gasoline, diesel and kerosene during the period, as against 57.792 million tons a year earlier.
The company’s Refining & Chemicals business experienced an operating loss of RMB 38.4 billion as against a profit of RMB 3.7 billion in the previous year period. This was due to PetroChina’s inability to shift the burden of rising oil costs to its consumers, as state policy requires a lid on domestic refined product prices.
In marketing operations, the group sold 107.247 million tons of gasoline, diesel and kerosene during January – September 2011, an increase of 18.0% year over year.
Liquidity & Capital Expenditure
As of September 30, 2011, PetroChina’s cash balance was RMB 101.1 billion, while net cash flow from operating activities was RMB 215.5 billion. Capital expenditure for the period reached RMB 161.1 billion, almost flat from the year-ago level.
Capital expenditure for the period reached RMB 160.7 billion, up 5.5% from the year-ago level.
Our Recommendation
PetroChina is the largest integrated oil company in China. The firm’s activities include: exploration, development, production and sale of crude oil and natural gas, refining, transportation, storage and marketing of petroleum products, manufacture and sale of chemical products, and transmission of natural gas, crude oil and refined products.
Going forward, the main growth driver for PetroChina will likely be its leverage to the fast-growing Chinese market and the turnaround in commodity prices. Being one of two Chinese integrated oil companies, PetroChina is well-positioned to capitalize on these favorable trends.
However, we are concerned about prospects for the company’s oil production growth, considering its heavy exposure to significantly mature-producing areas. Other near-term headwinds include high-priced gas imports in the face of low domestic gas sale prices, policy uncertainty and an ambitious investment program.
Consequently, we see PetroChina ADRs performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
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