By: Zacks Equity Research
August 26, 2011 | Comments: 0
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PTR | XOM Chinese energy giant PetroChina Co. Ltd. (PTR - Analyst Report) announced its first half 2011 earnings of RMB 66.0 billion or RMB 0.361 per diluted share, compared with RMB 65.3 billion or RMB 0.357 per diluted share in the year-earlier period. Earnings per ADR came in at $5.59 (exchange rate: US$1.00 = RMB 6.46, 1 ADR = 100 shares).
The slight improvement can be primarily attributable to higher oil prices and stronger volumes, which were almost offset by refining losses. PetroChina’s total revenue for the six months totaled RMB 952.2 billion, an increase of 39.1% from the year-earlier period.
Segmental Performance
Upstream: PetroChina, the world's most valuable oil and gas producer after ExxonMobil Corp. (XOM - Analyst Report), posted strong upstream output growth during the six months ended June 30, 2011. Crude oil output rose 5.0% from the year-ago period to 445.8 million barrels (MMBbl), while marketable natural gas output was up 5.3% to 1,185.9 billion cubic feet (Bcf).
Average realized crude oil price during the first six months of 2011 was $101.62 per barrel, representing an increase of 40.3% from $72.42 per barrel in the corresponding period of the previous year. This pushed up the upstream (or exploration & production) segment profit by 41.3% to RMB 103.7 billion.
Downstream: PetroChina’s refinery division processed 491.4 MMBbl during the six-month period, up from 439.1 MMBbl in 2010. The company produced 2.966 million tons of synthetic resin in the period (a rise of 7.4% year over year), besides manufacturing 1.819 million tons of ethylene (up 0.6% from the first half of 2010). It also produced 43.393 million tons of gasoline, diesel and kerosene during the period, as against 38.382 million tons a year earlier.
The company’s Refining & Chemicals business experienced an operating loss of RMB 20.9 billion as against a profit of RMB 5.5 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 mandated by the state policy of keeping a lid on domestic refined product prices.
In marketing operations, the group sold 66.79 million tons of gasoline, diesel and kerosene during January - June 2011, an increase of 12.2% year over year.
Liquidity & Capital Expenditure
As of June 30, 2011, PetroChina’s cash balance was RMB 116.1 billion, while net cash flow from operating activities was RMB 129.0 billion. Capital expenditure for the period reached RMB 71.1 billion, down 18.8% 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.
We believe that continuous demand growth in China – expected to outperform developed countries in the next few years – will fuel PetroChina’s medium-term earnings outlook. Additionally, we expect the company to benefit from attractive growth prospects in the downstream and natural gas sectors.
However, we are concerned by the high-priced gas imports in the face of artificially low domestic gas sale prices. Sluggish oil production growth prospects and heavy exposure to significantly mature producing areas also remain near-term headwinds, in our view.
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).