PetroChina Earnings: Downstream Operations Outperform Peers; H-Shares Undervalued

PetroChina’s 00857 cumulative nine-month net profit was up 10% year on year to CNY 131.7 billion, and beats the Refinitiv consensus. After updating our latest energy price and foreign exchange assumptions, we raise 2024-25 earnings estimates by 6%-17%. Consequently, our fair value estimate rises to HKD 6.50 per H-share (CNY 6.10 per A-share) from HKD 6.20 (CNY 5.70). We think PetroChina’s H-shares are currently undervalued, with an attractive 2024 dividend yield of more than 8%. However, CNOOC remains our top pick in the sector, given its cost efficiency and robust production growth.

The key highlight for the results is the higher capital expenditure guidance for 2023, which is expected to be similar to or slightly higher than 2022′s level, implying an increase of more than 12% from earlier guidance. The higher spending is mainly for the upstream segment and new energy projects. We believe this will support PetroChina’s reserves and production growth. Cumulative nine-month operating cash flow remains strong and increased 9% year on year to CNY 341.0 billion. Hence, we think the higher spending should not affect PetroChina’s dividend payout.

PetroChina’s downstream segments continued to outperform Sinopec’s in the first nine months. The refining segment’s operating profit rose 4% year on year, better than Sinopec’s 9% drop. Benefiting from better demand following China’s reopening, the marketing segment’s operating profit rose to CNY 17.3 billion from CNY 7.2 billion a year ago, versus Sinopec’s 15% growth. Although the chemical industry is suffering from excess capacity, PetroChina’s chemicals division was largely breakeven, but Sinopec was making a loss of CNY 2.8 billion. We think PetroChina’s downstream outperformance may be attributable to better cost structures and access to discounted crude oil. Given the outperformance in the downstream operations, we believe investors may prefer PetroChina over Sinopec for integrated oil players in the near term.