PetroChina Profit Squeeze Erodes Ratings Helping Putin

PetroChina Co. (857) is losing the support of analysts who say earnings growth at Asia’s biggest oil producer is stunted by its unprofitable natural-gas imports.

The average analyst rating slid to 3.4 on Nov. 8 from 4.1 in June. That’s the lowest in three years and the smallest of the world’s 15 largest oil and gas companies, according to data from 34 analysts compiled by Bloomberg. Buy ratings earn five points, holds get three and sells one.

China’s growing appetite for gas is squeezing the company more than competitors, pushing it to seek cheaper imports from exporters such as Russia. State-controlled PetroChina, which trades in Hong Kong, Shanghai and the U.S., is forced to import more natural gas every year for resale in the world’s largest energy market at below-market prices. The Chinese government curbs fuel costs for industries from power generation to fertilizer manufacturing to help limit inflation.

“Loss-making on gas is not likely to slow down for PetroChina, especially in the near term,” Sonia Song, a Hong Kong-based analyst at Nomura Holdings Inc. (8604), said Nov. 6 by telephone. “It’s unlikely the government will increase prices” enough to return gas imports to profit, she said.

The company will face increased pressure to do import deals involving Russian President Vladimir Putin or foreign operators in the U.S., which is years ahead in using advanced techniques to extract gas from rock formations that previously were off limits to explorers.

PetroChina, whose $250 billion market value is exceeded only by Exxon Mobil Corp., must double gas imports over the next three years and continue selling at a loss if state-price controls remain, Sanford C. Bernstein & Co.’s Hong Kong-based analysts Neil Beveridge and Ying Lou said in a Nov. 5 report.

Profit Low

In September, the company blamed higher import costs for producing its lowest third-quarter profit in at least five years. Nine-month operating profit at the gas and pipeline unit, which includes selling gas from domestic fields, dropped to 885 million yuan ($142 million) from 13.23 billion yuan a year earlier, the company said.

Even so, PetroChina’s total return including dividends to investors this year has been about 11.6 percent, beating the 4.5 percent average of the 15 biggest oil companies with full-year data, data compiled by Bloomberg show. Thirteen analysts have buy recommendations, five have sells and 16 rate it hold. At the end of June there were 21 buys, one sell and 14 holds.

Shares closed down 1.9 percent to HK$10.14 in Hong Kong, more than the 1.1 percent drop in the benchmark Hang Seng Index. The stock has declined 4.5 percent in the past 12 months, while the benchmark gained 8.6 percent.

’Golden Age’

PetroChina is set to boost profit 1.7 percent to 135 billion yuan this year, according to analyst data compiled by Bloomberg. Earnings will be buoyed by sales at market rates of crude that’s pumped overseas. It also sells oil from local fields to Chinese refiners at prices benchmarked to international prices, benefiting from higher crude rates.

“This may be the golden age of gas but it’s not yet the golden age for PetroChina,” Beveridge and Lou wrote in the report. “Gas will continue to act as a headwind on PetroChina earnings as losses mount” from imports.

China’s gas use will jump 56 percent to 5.6 quadrillion British thermal units in the four years through 2015, the U.S. Energy Information Administration has forecast. That’s about 10 fold the increase the agency expects for U.S. demand.

Price Reform?

The pinch for PetroChina could be a boon to Putin’s plans to invest $45 billion to produce and pipe natural gas from eastern Siberia to a liquefied natural gas plant in Vladivostok port for shipping to Asia. Confirmed customers in Asia could allow Russia’s OAO Gazprom (OGZD), the world’s biggest gas exporter, to go ahead with the project that will start supplies from 2018.

Export capacity to Asia may equal that volumes sold to Europe, Gazprom Chief Executive Office Alexey Miller said on Oct. 29 when the plans were announced.

China will rely on imports through pipelines and in liquid form in tankers to meet 30 percent of its gas requirements this year and 35 percent by 2015, according to the Bernstein report.

PetroChina controls more than 80 percent of its home gas market and imports are growing quickly, now accounting for about a third of China’s supply, Beveridge said.

“The problem is the cost of imported gas is significantly higher than the price they are able to sell it for,” he said. “Only a complete price reform can solve the problem, but we are not going to see much progress in the next six months because of China’s leadership transition.”

The company’s gas business is losing money because of the delay in energy price reform, PetroChina Chairman Jiang Jiemin, said at a briefing on Nov. 9 at the 18th Chinese Communist Party congress in Beijing.

Gas Imports

Despite that, PetroChina “will do the utmost to import gas” to meet China’s increasing demand, Jiang said. “The supply of natural gas is one of the biggest civil projects.”

Mao Zefeng, PetroChina’s Beijing-based spokesman, didn’t respond to calls and e-mails seeking further comment.

China sets the price at which gas can be sold in the country at about $7 per million British thermal units, the standard measure, to keep it affordable for lower-income regions and to control inflation, Song at Nomura said.

The government is experimenting with price increases for the fuel, mostly used in factories, and is running a pilot project in Guangdong and Guangxi, where it’s sold at about $12 per million British thermal units, she said.

Prices need to rise to about $20 per million Btu to hand PetroChina a profit from gas sales, Song said. This includes recovering expenditure to build pipelines.

Shale Gas

China is providing incentives to speed up production of shale gas, which is extracted from rock by blasting in liquids that break up shale trapping the fuel.

The country will subsidize shale gas production by offering 0.4 yuan a cubic meter for the fuel that’s developed and consumed from 2012 to 2015, the Ministry of Finance said in a Nov. 5 statement.

That will bring down the breakeven cost for output of shale gas to about $8 per million Btu, Song said. That’s almost equivalent to current prices and any increase will help companies make a profit.

“The breakeven price for shale gas is lesser, but shale is still far away,” she said.

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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