PTR Petrochina Company Ltd

Chinese energy giant PetroChina Co. Ltd. (PTR) announced its first quarter 2012 earnings of RMB 39.2 billion or RMB 0.21 per diluted share, compared with RMB 37.0 billion or RMB 0.20 per diluted share in the year-earlier period. Earnings per ADR came in at $3.33 (exchange rate: US$1.00 = RMB 6.3, 1 ADR = 100 shares).

The positive comparisons can be primarily attributable to improved performance from the Beijing-based company’s ‘Exploration and Production’ segment on the back of higher commodity prices and stronger volumes amid robust domestic energy demand. However, this was largely offset by government caps on fuel prices that eroded refining margins.

PetroChina’s total revenue for the three months totaled RMB 525.6 billion, an increase of 17.9% from the year-earlier period.

Upstream

PetroChina, which last year overtook Exxon Mobil Corp. (XOM) as the world's biggest listed oil producer, posted strong upstream output growth during the three months ended March 31, 2012. Crude oil output rose 3.6% from the year-ago period to 227.0 million barrels (MMBbl), while marketable natural gas output was up 11.2% to 710.9 billion cubic feet (Bcf).

Average realized crude oil price during the first three months of 2012 was $105.48 per barrel, representing an increase of 14.8% from $91.85 per barrel in the corresponding period of the previous year. Average realized natural gas price was $4.87 per thousand cubic feet (Mcf), 9.9% above the year ago level of $4.43.

The rising crude oil and natural gas output/prices drove the upstream (or exploration & production) segment profit by 31.6% to RMB 60.4 billion.

Downstream

PetroChina’s refinery division processed 257.1 during the three-month period, up from 250.1 MMBbl in 2010. The company produced 1.536 million tons of synthetic resin in the period (a rise of 2.8% year over year), besides manufacturing 921 thousand tons of ethylene (flat from the first three months of 2011). It also produced 23.03 million tons of gasoline, diesel and kerosene during the period, as against 22.00 million tons a year earlier.

However, the company’s ‘Refining & Chemicals’ business registered an operating loss of RMB 10.8 billion, as against a much narrower year-earlier period loss of RMB 3.7 billion, hurt by 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 gasoline and diesel prices.

In marketing operations, the group sold 36.50 million tons of gasoline, diesel and kerosene during January - March 2012, an increase of 15.5% year over year.

Liquidity & Capital Expenditure

As of March 31, 2012, PetroChina’s cash balance was RMB 99.2 billion, while net cash flow from operating activities was RMB 21.8 billion. Capital expenditure for the period reached RMB 71.0 billion, up 33.9% from the year-ago level.

Rating & 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.

As such, we see the ADR performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

 
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