From strength to strength
- Guiding 1H net profit to rise 50%-60% y-o-y to Rmb79.5-85.0bn
- Attributable to high oil prices and probably stronger-than-expected downstream performance
- FY22/23 earnings are lifted by 28%/22%, respectively, reflecting the stronger-than-expected 1H
- Reiterate BUY; TP HK$5.50
Investment Thesis
Prime oil price proxy with its 60%-70% earnings exposure to the upstream segment. Historically, its share price mirrors oil price movements with a high correlation coefficient of 0.8x. The earnings turnaround since 2021 was a confidence booster. We expect earnings to grow by 45% in 2022 on the back of higher oil prices.
Attractive dividend yield.
PetroChina offers ~8% dividend yield.
This is supported by stronger operating cash flows in anticipation
of sustained high oil prices and downstream demand.
Valuation:
Our SOTP-based TP is HK$5.50, and the E&P segment alone is worth HK$2.68/share, representing about 55% of the total equity value. Natural gas & pipeline, refining & chemicals, and marketing account for the remaining 23%, 10%, and 12%, respectively.
Valuation remains undemanding at ~0.4x P/BV, near its five-year mean, which is unwarranted, in view of improving oil and gas demand. Our TP implies ~0.8x P/BV (1SD above mean), which seems fair against ~8% ROE.
Where we differ:
Market has over-penalised PetroChina for policy risks and concerns on imported gas losses. We are optimistic that the liberalisation of the gas sector to market-based pricing will eventually allow cost pass-through.
Key Risks to Our View:
Oil price risk.
Oil price volatility caused by the geopolitical situation. Unexpected supply increase from OPEC+ members and US shale players or a dip in demand could lead to a correction in oil prices, thus impacting PetroChina’s profits.
