We are downgrading PetroChina ADRs from Outperform to Underperform.
The weak crude pricing environment since August 2014 has been
affecting the company's upstream operations. On top of that, we
don't see any immediate spike in crude prices with plentiful
supplies in the face of lackluster demand. Moreover, the integrated
Chinese energy player reported disappointing third-quarter 2014
results, mainly due to poor demand for petroleum products. We also
remain concerned about the company's oil production growth
prospects, considering its heavy exposure to significantly mature
producing areas. Owing to these factors, we see PetroChina as a
risky bet that investors should exit.
PetroChina Company Limited (PTR) is the largest integrated oil
company in China. The company's activities include: the
exploration, development, production and sale of crude oil and
natural gas, the refining, transportation, storage and marketing of
petroleum products, the manufacture and sale of chemical products,
and the transmission of natural gas, crude oil and refined
PetroChina was established in November 1999 as a part of a
restructuring of China National Petroleum Corporation (CNPC), a
state-owned entity, which currently holds a majority stake of
86.35% in PetroChina. The company operates in four segments:
Exploration & Production, Natural Gas & Pipelines, Refining
& Chemicals, and Marketing.
Exploration & Production: PetroChina is one of the largest
producers of crude oil and natural gas in the world, with 2013
production of 932.9 million barrels of crude oil and 2,801.9
billion cubic feet (Bcf) of marketable natural gas. As of year-end
2013, the company had approximately 22.4 billion barrels of oil
equivalent in proved reserves (increased nominally from previous
year), of which approximately 48.4% was liquids (56.7% proved
developed) and the rest natural gas (47.3% proved developed).
Most of PetroChina's crude oil and natural gas reserves and
production-related assets are located in China, principally in
northeastern, northern, southwestern and northwestern China. The
Songliao basin, located in Heilongjiang and Jilin provinces in
northeastern China, including the Daqing and Jilin oil regions,
accouns for approximately 40% of the company's proved crude oil
reserves and production. The company also has significant crude oil
reserves and operations in the area around the Bohai Bay, including
the Liaohe, Dagang, Huabei and Jidong oil regions, which makes up
roughly 20% of its proved crude oil reserves and production.
PetroChina's proved natural gas reserves and production are
generally concentrated in northwestern and southwestern China,
specifically in the Erdos, Tarim, and Sichuan basins.
Natural Gas & Pipelines: PetroChina is the largest
transporter and seller of natural gas in China in terms of sales
volumes. The company sells natural gas primarily to fertilizer and
chemical companies, commercial users and municipal utilities owned
by local governments. Its existing natural gas pipelines form
regional natural gas supply networks in northwestern, southwestern,
northern and central China, as well as the Yangtze River Delta.
PetroChina's midstream assets include a vast network of natural gas
pipelines, with a total length of roughly 21,304 kilometers,
representing the bulk of China's onshore natural gas pipelines. A
major midstream project is the 4,843-kilometer west-to-east
pipeline II that transports gas produced in the company's natural
gas fields in the western and southwestern regions of China to
large potential markets in eastern China. In October 2004,
PetroChina completed the construction of the main line of the
west-to-east pipeline and commenced commercial operation in
December 2004. Since then, it has built 3 connecting pipelines for
this project. As of Dec 31, 2013, the company owned and operated a
crude oil pipeline network of 17,614 kilometers, natural gas
pipeline network spanning 43,872 kilometers, and refined product
pipeline network of 9,534 kilometers.
Refining & Chemicals: PetroChina's refining operations
include 2.58 million barrels per day in refining capacity.
PetroChina operates 29 refineries located in eight provinces, four
autonomous regions and one municipality. The company's operations
include the refining, transportation, storage and marketing of
crude oil, and the wholesale, retail and export of refined
products, including gasoline, diesel, kerosene, lubricant,
paraffin, and asphalt. In 2013, PetroChina's refineries processed
992.3 million barrels of crude oil and produced approximately 90.28
million tons of gasoline, diesel and kerosene.
The company is also the second largest manufacturer of chemicals
in China, producing and selling a wide range of basic and
derivative petrochemical products and other chemical products
through 17 chemical plants and 4 chemical products sales companies.
PetroChina's chemical plants and sales companies are located in six
provinces, three autonomous regions and two municipalities under
the direct administration of the central government in China.
Marketing: The firm's marketing operations include a
distribution network of more than 20,000 retail sites, 23 regional
sales and distribution branch companies, and one lubricants' branch
company. Additionally, the company markets a range of refined
products, including gasoline, diesel, kerosene and lubricants,
through a network of sales personnel and independent distributors
and a wholesale and retail distribution system across China.
PetroChina Company Limited - ADR (PTR): Read the
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