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Refining Losses Hurt PetroChina

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Chinese energy giant PetroChina Co. Ltd. (PTR - Free Report) announced 2011 earnings of RMB 133.0 billion or RMB 0.73 per diluted share, compared with RMB 140.0 billion or RMB 0.76 per diluted share a year earlier. Earnings per ADR came in at $11.41 (exchange rate: US$1.00 = RMB 6.4, 1 ADR = 100 shares), lower than the Zacks Consensus Estimate of $12.47.

The negative comparisons can be primarily attributable to government caps on fuel prices that eroded refining margins. This was somewhat offset by robust performance from the Beijing-based company’s ‘Exploration and Production’ segment on the back of higher oil prices and stronger volumes amid robust domestic energy demand.

PetroChina’s total revenue for the year totaled RMB 2,003.8 billion, an increase of 36.7% from the year-earlier period.


PetroChina, the world's biggest listed oil producer ahead of Exxon Mobil Corp. (XOM - Free Report) , posted strong upstream output growth during the twelve months ended December 31, 2011. Crude oil output rose 3.3% from the year-ago period to 886.1 million barrels (MMBbl), while marketable natural gas output was up 7.9% to 2,396.4 billion cubic feet (Bcf).

In particular, average realized crude oil price during 2011 was $104.20 per barrel, representing an increase of 42.9% from $72.93 per barrel in the previous year. This drove the upstream (or exploration & production) segment profit by 42.8% to RMB 219.5 billion.


PetroChina’s refinery division processed 984.6 MMBbl during the twelve-month period, up from 903.9 MMBbl in 2010. The company produced 5.690 million tons of synthetic resin in 2011 (a rise of 2.5% year over year), besides manufacturing 3.467 million tons of ethylene (down 4.1% from 2010). It also produced 87.2 million tons of gasoline, diesel and kerosene during the period, as against 79.5 million tons a year earlier.

However, the company’s ‘Refining & Chemicals’ business registered an operating loss of RMB 61.9 billion, as against the year-earlier period profit of RMB 7.8 billion, hurt by PetroChina’s inability to shift the burden of rising oil costs to its consumers, as mandated by the state policy of keeping a lid on gasoline and diesel prices.

In marketing operations, the state-owned group sold 145.53 million tons of gasoline, diesel and kerosene during January–December 2011, an increase of 20.4% year over year.

Liquidity & Capital Expenditure

At the end of 2011, PetroChina’s cash balance was RMB 61.2 billion, while cash flow from operating activities was RMB 290.2 billion. Capital expenditure for the period reached RMB 284.4 billion, up 3.0% from the year-ago level.

2012 Guidance

Going forward, leverage to the fast growing Chinese market and the turnaround in energy demand is expected to be the main growth drivers for PetroChina. Being one of the two Chinese integrated oil companies, PetroChina – together with Sinopec (SNP - Free Report) – is well-positioned to capitalize on these favorable trends. The company’s 2012 results are likely to benefit from increased production, firm energy prices and contributions from overseas asset additions.

PetroChina aims to boost overall output by around 3% this year, driven by overseas asset acquisition. In particular, the company is readying a war chest of at least $60 billion to snap up oil and gas properties abroad over the next decade to tide over the refining losses. China’s dominant crude producer has projected an investment of RMB 300.0 billion in 2012, up 5.5% year-over-year.

Further, PetroChina intends to step up its efforts to unlock the huge unexploited domestic shale gas reserves (natural gas trapped within dense sedimentary rock formations) to usher in an era of energy independence for the country. In fact, the energy major expects its annual shale gas production to reach 1.5 billion cubic meters by 2015, or 23% of total Chinese natural gas supply.

Rating & Recommendation

PetroChina ADRs currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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