PetroChina Earnings: Robust Upstream Division; Downstream Segments Outperform Peers

PetroChina’s 00857 first-half 2023 net profit of CNY 85.3 billion, up 4% year on year, beat our expectation. After incorporating our latest energy price and foreign exchange assumptions, our earnings estimates for 2023-25 increase by 12%-39%, and we raise our fair value estimate to HKD 6.20 per H-share (CNY 5.70 per A-share) from HKD 5.70 (CNY 4.98). We think PetroChina’s H-shares are currently fairly valued, although the estimated 2023 dividend yield of about 8% should continue to support its share price. Operating cash flow increased 13% year on year to CNY 221.7 billion and we think this indicates upside to our 2023 estimated payout ratio of 50%.

PetroChina’s downstream segments outperformed Sinopec’s in the first half of 2023. The refining segment’s operating profit fell 23% year on year, but this was better than Sinopec’s 62% drop. Meanwhile, the marketing segment’s operating profit rose 28% due to a significant increase in trading profit, versus Sinopec’s flat performance. We think marketing segment earnings will normalize given the lack of trading profit, moving forward. While PetroChina’s chemicals division was loss-making in the first half due to increasing competition, similar to Sinopec’s, we note PetroChina delivered an operating profit of CNY 765 million in the second quarter of 2023, better than Sinopec’s loss of CNY 1.6 billion. We think PetroChina’s downstream outperformance may be attributable to better cost structures and access to discounted crude oil.

PetroChina’s resilient upstream division in first-half 2023 is in line with peers. Despite falling oil prices, upstream earnings were 4% higher year on year, likely attributable to a 6% increase in oil and gas output, and a 7% drop in lifting cost to USD 10.82 per barrel. In addition, operating profit for the natural gas sales segment was up 3%. We believe the segment should see robust earnings ahead given the introduction of cost pass-through policies in the sector.