1) PetroChina is by far the biggest beneficiary of Gas price reform – we feel commodity price reform will be one of the first reforms the Chinese government pursues this year.
- the largest % production of Gas (contributes 70% of current domestic supply)
- by far the largest Gas reserves (50% of total Chinese reserves on a highly conservative basis) – see below
- It also has been subsidising the market the most through Turkmenistan imports which, with continued price reform will become considerably more economic.
2) There is a huge opportunity for PetroChina as Urbanisation plans are implemented.
- Urbanisation will have a huge impact to Gas demand, maturing household gas consumption (currently 20% of total gas usage) as the density of homes per km of pipe will improve gas economics.
- Commodity price reform will drive investment into developing China’s vast Gas reserves
- China currently imports around 25% of its total Gas requirements at a loss to upstream companies who effectively subsidise the market. Raising the city gate price and introducing pricing reform will close this loss and encourage domestic development and exploration (as happened in the US leading to the Shale revolution)
- China’s gas consumption per Capita is low in a Global context, something the government is trying to remedy.
3) Earnings are turning around (even without the gas upside) and the stock is trading on all time low PB valuation.
Key beneficiary of Commodity Price reform, both on Valuation and Earnings.
- Heavily exposed to Urbanisation upside
- Earnings (ex-Gas) have been improving
- PB levels (normally the key valuation metric for the Chinese Integrated names) is at all time lows.
- If we assume that the recent 15% gas price increase is rolled out to all sectors by the end of this year the EPS impact to the company from both domestic price increase and imported gas becoming economic would be in the region of 20%.
- The long term implication to NAVs given the re pricing of both outlook and reserves could see the stock re-rate further than this however.
PetroChina 5 year PE (Top) and PB (bottom) trends
