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PTR AT A GLANCE

P/E ► 30.6 VERY HIGH EV/EBITDA ► 12.8 AVG ROA ► 11.9% HIGH ROE ► 17.2% AVG Debt to Equity ► 0.660 LOW Current Ratio ► 0.893 LOW Interest Coverage Ratio ► 32.5 AVG

 

 

 

 

 

 

PetroChina is the largest oil and gas producer in China and the second largest company in China in terms of revenue.^[1] PetroChina is an integrated oil and gas company whose operations include oil and gas exploration and production, refining, and the marketing and transportation of oil, refined products, natural gas, and other petrochemicals.^[2] The company’s largest segments are its refining and marketing segment and its exploration and production segment, which generated $127,911 million and $89,043 million in net income in 2008, respectively.^[3] In 2008, profits from PetroChina’s exploration and production operations increased 15.8% year-over-year and were the largest contributor to net profits for the year. In 2008, the total natural gas and oil output reached 1,185 million barrels of oil equivalent.^[4] In its refining segment, the company increased production of gasoline, kerosene, and diesel during 2008 in order to meet the demands of a growing automotive industry. The company has three ten-million ton refineries, and established a terminal distribution network in 2008. Its refineries processed 849.8 million barrels of oil equivalent in 2008.^[5] Because almost all of the company’s 2008 earnings came from oil and natural gas operations, Petrochina’s future revenues depend heavily on the price and consumption of natural gas and oil in China. PetroChina sells its oil and natural gas products at prices determined by the Chinese government.^[6] Although government set prices are not as susceptible to changes due to market conditions as oil sold in North America, government policies like fuel price caps and windfall taxes were partially responsible for the 22% decline in annual profits in 2008.^[7] However, government regulation has its benefits as well; the company also received government subsidies equivalent to $ 2.3 billion for losses in oil refining.^[8] For PetroChina, the ability to generate revenues from its operations not only depend on the oil and natural gas markets in China but also rely on the responsiveness of the Chinese government to changing energy prices.^[9] The government launched a new pricing mechanism for refined products in early 2009, which ensures profits of oil refiners according to an analyst at Orient Securities.^[10]

Business and Financials

Refining and Marketing: Through the 26 refineries it owns, PetroChina processes crude oil into refined petroleum products and sells them through its distribution branches. In 2008, PetroChina produced 90.1 billion tons of petroleum products. Its four principal refined products are gasoline, kerosene, diesel, and lubricants. In 2008, sales volumes of diesel and gasoline increased 3.7% and 7.4%, respectively.ref>PetroChina 20-F for 2008</ref> PetroChina expanded its refining capacity through the completion of 19 refining projects in 2008. PetroChina invested approximately $3.9 billion in 2007 and $2.9 billion in 2008 in the construction of new refineries as well as in improvements to its existing refineries.ref>PetroChina 20-F for 2008</ref>Average utilization of its refineries was 97.7% in 2007, but PetroChina reduced average utilization 2.8% in 2008 in response to declining gasoline and diesel consumption.ref>PetroChina 20-F for 2008</ref>

A large portion of the crude oil processed at PetroChina’s refineries comes from the crude oil PetroChina extracts from the ground. In 2008, PetroChina’s production operations supplied its refineries with 77% of the crude oil processed that year.ref>PetroChina 20-F for 2008</ref> To cut transportation and storage costs, a majority of the refineries are located close PetroChina’s storage facilities and transportation pipelines or railways. PetroChina sells its refined petroleum products through its 16,725 retail businesses and 802 regional wholesale distribution outlets.ref>PetroChina 20-F for 2008</ref>

The company’s retail stores are located primarily in northern parts of China, but PetroChina has the potential of expanding its southern operations through joint ventures with oil majors like BP.^[11]

Exploration and Production: Through its exploration and production operations, PetroChina searches for and extracts crude oil and natural gas. PetroChina’s E&P operations are primarily located in the northeastern, northern, southwestern, and northwestern regions of China.^[12] As of the end of 2008, the company’s estimated proved reserves were 11.2 billion barrels of crude oil and 61.2 billion cubic feet of natural gas.^[13] Its northeastern operations accounted for 38.9% of PetroChina’s proved reserve as of December 31, 2008. On the other hand, the largest concentration of PetroChina’s proved natural gas reserves are located in the northwestern and southwestern parts of China. In 2008, PetroChina applied to the Ministry of Land and Resources for exploration and production licenses covering the southern part of the South China Sea. In 2008, PetroChina produced 870.7 million barrels of crude oil and 1.8 billion cubic feet of natural gas.^[14] Net Income for 2008 was $35 billion.^[15]

Chemicals: The company’s Chemical segment produces and sells petrochemicals, chemicals, and petrochemical derivatives.^[16] In 2008, production of chemical products and ethylene was 16.27 million tons and 2.68 million tons, respectively. Petrochina sells its chemical products to manufacturers in the the automotive, construction, electronics, medical manufacturing, printing, electrical appliances, household products, insulation, packaging, paper, textile, paint, footwear, agriculture and furniture industries.^[17]

Trends and Forces

As an Affiliate of China's Largest State Oil Company, PetroChina Enjoys Monopolistic Powers

China National Petroleum Company is the largest state-owned vertically integrated oil and gas company in China; the Chinese government owns 88% of PetroChina^[18] - and has control over appointing the board of directors. China's government tends to award contracts for operations within the country - exploration and production, for example, or retail station operation - and as an affiliate of the largest state-owned oil company (and an international, publicly traded corporation that attracts foreign investors), PetroChina gets the lion's share of China's oil business. Not only that, no Western companies are yet allowed to explore in China, and imported oil faces heavy tariffs, so PetroChina faces little competition from the supermajors.

PetroChina's Business is Reliant on the Chinese Market

While PetroChina has begun to expand its exploration and production operations abroad, the company is only allowed to sell its crude and refined products in China. Currently, China produces a little more than 3.4 million barrels per day^[19] - less than half of the 7.9 million barrels per day projected for its 2007 demand^[20]. The country's government is loathe to become dependent on foreign oil, and has imposed high taxes on imported crude and refined products in order to stimulate the growth of its own oil companies (like PetroChina). As the Chinese economy grows, the country's demand will continue to out-pace its supply, driving prices up further - another good thing for PetroChina. In the current international economy, however, the credit crunch and possibility of a recession in Western markets could lead to a slowing of China's export-based manufacturing economy, causing oil demand to fall and PetroChina's business to go with it - especially if competition increases from international oil companies in the future.

To secure future oil supplies, PetroChina expands its abroad operations

As China’s biggest oil company, PetroChina has the potential of expanding its refining capacity through the purchase of foreign-located refineries.^[21] In 2009, PetroChina announced that it was in talks about expanding its refining operations into Europe through an investment in the Ineos refinery at Grangemouth in Scotland.^[22] After falling heavily into debt, lneos began speaking to numerous large oil companies about investments or a possible acquisition of the refinery.^[23]

The possible investment in lneos is part of PetroChina's plan to boost its refining capacity worldwide.^[24] In June 2009, PetroChina purchased two pipelines in western China from its state-owned parent for $1.4bn.^[25] In May, PetroChina agreed to buy 45.5 percent of Singapore Petroleum Company in the first major Chinese offshore acquisition of a downstream energy company. For the 45.5 percent stake, PetroChina paid $1 billion.^[26]

In September 2009, PetroChina invested $1.7 billion in the development of Canadian oil sands. Many oil majors have decreased their investments in oil sands because the oil is expensive to extract, but PetroChina's easy access to credit and ability to handle sour heavy crude oil makes Canadian oil sands more financially viable.^[27] Heavy oil has a lower commercial value compared to lighter grades because it requires more sophisticated production and refining equipment.^[28] However, when light oil prices are high, companies that can refine heavier crude do not experience severe declines in refining margins. PetroChina's investment is massive; analysts predict PetroChina's projects have the potential of increasing the share of oil sands production shipped to Asia to about 15% by 2015, compared with 1% in 2009.^[29]

Chinese Gas demand fuels Australian field development and Oil Majors' gas operations

In August 2009, PetroChina and Exxon Mobil signed a $41 billion deal in which Exxon agreed to supply the Chinese energy company with liquid natural gas(LNG) for the next 20 years.^[30] As China's energy needs continue to grow, PetroChina signed the agreement to secure a long-term supply of liquefied natural gas.^[31] Exxon plans on supplying PetroChina will LNG extracted from its Gorgon project in Australia. Exxon owns a 25% interest in the offshore Gorgon LNG facility, with Chevron Corp. holding 50% and Royal Dutch Shell holding a 25% stake.^[32] Although the three oil majors have plans to sell their gas independently, China's expected need of resources like natural gas helped attract investments in the Gorgon region.^[33] The Gorgon gas field, which potentially has reserves of more than 40 trillion cubic feet, is close to many developing Asia countries and does not potentially have the same transportation expenses as fields in Europe or the US.^[34]

PetroChina cuts 2009 expectations, investments in anticipation of weak demand for oil

In 2008, PetroChina's profits fell 22% when compared to annual profits in 2007. Zhou Jiping, the President of PetroChina, attributed the fall in annual profits to lower oil consumption in the second half of 2008 as well as government policies.^[35] The decline in oil prices and energy consumption most affected the company's refining segment, which had an annual net loss of approximately $12.1 billion in 2008.^[36] The decline in energy prices had less of an effect on PetroChina's exploration and production segment, which generated profits that were 15.8% higher than in the previous year.^[37] Production of oil and gas both increased in 2008. In particular, natural gas production increased 14.5% in 2008, and the company's natural gas and pipeline segment's operating profits rose 28.5% in 2008.^[38] Government policies including a special tax on domestic crude oil sold at more than $40 per barrel, and national ceilings on domestically refined oil products significantly reduced the company's profits in 2008.^[39] Although PetroChina received a government subsidy worth approximately $2.3 million for losses in its refining segment, the company paid almost $6 billion more in taxes in 2008.^[40] However, the new government pricing mechanisms introduced in 2008 have the potential to change the effect taxes and price caps have on PetroChina's annual profits.^[41]

In March 2009, PetroChina reduced its 2009 production expectations by 10% to 20% in response to weak demand for crude oil.^[42] The production cuts in 2009 will apply to all of the company's oilfields except for the company's two largest fields, the Daqing and Changqing fields.^[43] PetroChina's 2009 production expectations for the Daqing field are close to actual production in 2008.^[44] Despite lower oil consumption levels, production in the Changqing fields has the potential to increase in 2009 as PetroChina invests in more production equipment for the region.^[45]

For the first quarter of 2009, PetroChina’s net earnings and profits dropped due to lower oil prices and declining production. When compared to the first quarter of 2008, both net earnings and net profits dropped 35.2% in the first quarter of 2009.^[46] Refining output fell 14.6% from a year earlier, and the company produced 5.7% less crude oil for the quarter.^[47] PetroChina’s reduced both its production and refining outputs in response to declining domestic consumption.^[48] While domestic sales of refined products were 2.8% lower in the first quarter of 2009, the International Energy Agency has forecast that China’s oil demand has the potential of dropping .8% in 2009.^[49] Earnings for future quarters of 2009 are capable of increasing if international prices remain at $50 and the Chinese government opts to raise retail fuel prices.^[50]

Although lower oil prices and production cuts led to a 23% drop in third quarterly profit, PetroChina is expected to benefit from the the recovering Chinese economy.^[51] PetroChina cut production 3.7% during the first nine months of 2009 in response to weaker oil demand and oil prices that were on average 49.5% lower when compared to prices in 2008.^[52] However, many analysts are predicting a rebound in oil prices during the fourth quarter of 2009. As China's largest supplier of oil, PetroChina's sales depends heavily on the demand for energy resulting from economic growth in China.^[53] In the third quarter, China's economic growth rose to 8.9% from 7.9% in the second quarter. Accelerating growth in China has the potential of boosting PetroChina's fourth quarter earnings.^[54]

Despite Low Energy Consumption, PetroChina expands operations

On May 24, 2009, PetroChina secured a 45.5% stake in the Singapore Petroleum Company from the Keppel Corporation Limited (BN4'B-SG) for $1 billion . PetroChina is awaiting Chinese regulatory clearance before it purchases the remaining 54.5% of the Singapore downstream energy company.^[55] The purchase is part of PetroChina's plan to expand its international operations, particularly in Asia.^[56] For the most part, Chinese companies like SINOPEC Shangai Petrochemical Company (SNP) and PetroChina have been encouraged by the Chinese government to purchase upstream companies.^[57]

Competition

Because PetroChina is a subsidiary of China's largest state-owned oil company, it currently has few major competitors - among them, CNOOC and Sinopec. Once China opens up to international development, however, PetroChina will face retail and exploratory competition from the oil majors. While this may seem like a huge advantage, given that PetroChina cannot sell outside of its country, retail stations opened in China by foreign companies must be opened in joint venture with Chinese companies - and Sinopec and PetroChina are the most likely to be involved. Furthermore, it remains to be seen whether or not the country will remove the petrol tariffs that prevent the international oil community from competing effectively with PetroChina. The oil majors and nationals - Exxon Mobil, Chevron, Shell. BP, ConocoPhillips, Eni S.p.A., LUKOIL, etc. - are vertically integrated oil companies that explore, extract, and refine petroleum products. Supplying their own oil allows them to keep margins down, while their immense size allows them to keep capital expenditures high to expand refining capacity and increase exploration and production globally.

2007 production data is as yet unavailable for PetroChina, but below are some metrics for its future competitors.

Notes

1. ↑ PetroChina: 2008 Annual Report
2. ↑ PetroChina: 2008 Annual Report
3. ↑ PetroChina: 2008 Annual Report
4. ↑ PetroChina: 2008 Annual Report
5. ↑ PetroChina: 2008 Annual Report
6. ↑ China Daily: PetroChina's net profit for 2008 down 22%, March 2009
7. ↑ China Daily: PetroChina's net profit for 2008 down 22%, March 2009
8. ↑ China Daily: PetroChina's net profit for 2008 down 22%, March 2009
9. ↑ China Daily: PetroChina's net profit for 2008 down 22%, March 2009
10. ↑ China Daily: PetroChina's net profit for 2008 down 22%, March 2009
11. ↑ PetroChina 20-F for 2008
12. ↑ PetroChina 20-F for 2008, page 22
13. ↑ PetroChina 20-F for 2008, page 22
14. ↑ PetroChina 20-F for 2008, page 22
15. ↑ PetroChina 20-F for 2008, page 22
16. ↑ PetroChina 20-f for 2008, page 38
17. ↑ PetroChina 20-f for 2008, page 38
18. ↑ Self Investors: "China Oil Perspective - CNOOC (CEO), PetroChina (PTR) & China Petroleum (SNP)"
19. ↑ Earth Policy Institute: "Is World Oil Production Peaking?"
20. ↑ China Institute: "China 2007 oil demand steady at 7.9 mln bpd - EIA"
21. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
22. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
23. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
24. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
25. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
26. ↑ Financial Times Online: PetroChina in talks on UK investment, June 2009
27. ↑ WSJ: PetroChina Invests $1.7 Billion in Oil Sands, September 2009
28. ↑ WSJ: PetroChina Invests $1.7 Billion in Oil Sands, September 2009
29. ↑ WSJ: PetroChina Invests $1.7 Billion in Oil Sands, September 2009
30. ↑ Marketwatch.com: Exxon Mobil to sell Australian LNG to PetroChina, August 2009
31. ↑ Marketwatch.com: Exxon Mobil to sell Australian LNG to PetroChina, August 2009
32. ↑ Marketwatch.com: Exxon Mobil to sell Australian LNG to PetroChina, August 2009
33. ↑ Marketwatch.com: Exxon Mobil to sell Australian LNG to PetroChina, August 2009
34. ↑ Marketwatch.com: Exxon Mobil to sell Australian LNG to PetroChina, August 2009
35. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
36. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
37. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
38. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
39. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
40. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
41. ↑ china daily: PetroChina's net profit for 2008 down 22%, March 2009
42. ↑ Reuters:PetroChina cuts '09 output targets on falling demand, March 2009
43. ↑ Reuters:PetroChina cuts '09 output targets on falling demand, March 2009
44. ↑ Reuters:PetroChina cuts '09 output targets on falling demand, March 2009
45. ↑ Reuters:PetroChina cuts '09 output targets on falling demand, March 2009
46. ↑ FT.com:PetroChina reports 35% fall in earnings, April 2009
47. ↑ FT.com:PetroChina reports 35% fall in earnings, April 2009
48. ↑ FT.com:PetroChina reports 35% fall in earnings, April 2009
49. ↑ FT.com:PetroChina reports 35% fall in earnings, April 2009
50. ↑ FT.com:PetroChina reports 35% fall in earnings, April 2009
51. ↑ WSJ: UPDATE: PetroChina 3rd-Quarter Net Profit Down 23%; Below Forecast, October 2009
52. ↑ WSJ: UPDATE: PetroChina 3rd-Quarter Net Profit Down 23%; Below Forecast, October 2009
53. ↑ WSJ: UPDATE: PetroChina 3rd-Quarter Net Profit Down 23%; Below Forecast, October 2009
54. ↑ WSJ: UPDATE: PetroChina 3rd-Quarter Net Profit Down 23%; Below Forecast, October 2009
55. ↑ Financial Times: PetroChina secures 45% SPC stake, May 2009
56. ↑ Financial Times: PetroChina secures 45% SPC stake, May 2009
57. ↑ Financial Times: PetroChina secures 45% SPC stake, May 2009
58. ↑ COP 2007 10-K
59. ↑ RDS 2007 10-K
60. ↑ XOM 2007 10-K
61. ↑ CVX 2007 10-K
62. ↑ BP 2007 10-K
63. ↑ LUKOIL Company: General Information
64. ↑ E 2007 Annual Report
65. ↑ Total 2007 Results Press Release
66. ↑ SUN 2007 10-K
67. ↑ CVX 2007 10-K
68. ↑ VLO 2007 10-K
69. ↑ XOM 2007 10-K
70. ↑ RDS 2007 20-F
71. ↑ SHI 2006 Fact Sheet
72. ↑ WNR 2007 10-K
73. ↑ COP 2007 10-K
74. ↑ BP 2007 20-F
75. ↑ LUKOIL Company: General Information
76. ↑ E 2007 Annual Report
77. ↑ Total Website: "From Crude Oil to the Consumer"
78. ↑ Conversion factor is 1 BPD = 50 tonnes per year
79. ↑ Obtained by Dividing Total Throughput of 2.413 MMBPD by utilization rate of 89%
80. ↑ Sinopec Refining Overview

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