China oil/gas trip: key takeaways
We are more bearish on the sector following our company visits in Beijingand tight gas field trip in Shanxi. In our opinion, there is more scope forconsensus to revise downwards oil price forecasts, and lower 2015 earningsestimates and target prices. We continue to recommend UW the oil/gassector until 2Q15F when earnings will most likely reach a cyclical trough.
Among big caps, we like PetroChina’s (857 HK, Buy) long-term gas reformre-rating potential. Meanwhile, among mid-small caps, COSL (2883 HK,Buy), Anton (3337 HK, Buy) and Hilong (1623 HK, Buy) appear to be bestleveraged to the potential rebound of oil prices in 2H15F.
Top ten takeaways from our China trip
Most industry contacts believe there is a small probability that OPEC willannounce significant production cuts (at least 500,000 bopd) at the cartel’smeeting in Vienna next Thursday. This could imply more near-termdownside ahead for global oil prices, especially if China’s economic growthheadlines disappoint amid concerns of imminent US rate hikes. We willreview our USD89 oil price forecast for 2015F following the OPEC meeting.
Still many believe that oil futures are “oversold”, and oil prices will rebound tomuch higher levels in the long term.
There is a general consensus among producers and contractors that Chinawill struggle to achieve the 30bcm shale gas production target by 2020 dueto difficult geology, logistics and unattractive economics. China alreadyhalved its target from 60bcm earlier this year. According to the president ofGDF Suez, China could see increased LNG imports ahead despitecompetition from domestic and Russian pipeline gas. During APEC, Chinasigned free trade agreement with Australia, which could lead to lower importduties on high-quality coal.
PetroChina, Sinopec and CNOOC and COSL are all indicating potentialearnings declines in 2015 amid lower oil prices ahead. China’s voluntaryrevelation of the government’s strategic oil stockpiling volumes could alsomake global demand data more transparent. This will mitigate the occasionalmarket jitters and the oil price volatility.
PetroChina sees increased risk of the National Development and ReformCommission (NDRC) cutting domestic gas sales prices during summer 2015,especially if oil prices remain depressed in 2H15. PetroChina expects tostrike more deals with Russia, in both oil/gas during 2015. PetroChina’spriority remains focused on the more commercially attractive conventionalgas, followed by tight gas, coal bed methane. Shale gas is deemed as leastattractive unless the government offers more financial incentives.
PetroChina sees no likelihood that the Ministry of Finance will revise lowerthe domestic upstream windfall profit tax this year. Together with Sinopecand CNOOC, the oil companies will continue their lobbying for lower taxesnext year. The firm is likely to struggle to achieve its 2014 oil productiontarget as many marginal wells have been shut amid declining oil prices andflattish to declining upstream E&P capex.
There is increased probability that Sinopec Kantons will complete the Jinangas pipeline acquisition from parent Sinopec during 1Q15.
Sinopec expects persistent weakness in demand from diesel sales in 2015and is not forecasting meaningful rebound in petrochemicals despite lowernaphtha raw material price. Sinopec is seeing higher non-fuel salespenetration at the marketing business level and aims to further increasemargin via more efficient cooperation with financially savvy partners andonline sales.
CNOOC will most likely revise downwards the firm’s 2015 oil/gas productiongrowth targets amid lower oil prices and lower capex spending. The failure ofthe US to pass the Keystone XL pipeline from Canada to Texas could hurtthe oil pricing of the Canadian oil sands projects.
COSL’s fleet utilisation and rig pricing could come under downward pressureamid weak oil prices as customers postpone projects and cut spending. Thedeepwater semisub Prospector has just been delivered and will most likelystart work in offshore China starting 2H15, as overseas demand fordeepwater drilling remains depressed. COSL will provide detailed revenuegrowth and margin guidance for 2015 ahead of Chinese New Year.
Following the Halliburton & Baker Hughes merger agreement and Technip’shostile offer to acquire CGG, a seismic geophysical specialist, many industryplayers now seem to believe that Chinese oil field services players are ripefor consolidation. To satisfy regulators, we believe Halliburton & BakerHughes might also be divesting some high-quality assets that Chinese oilfield services (both domestic and private) could be interested in. Insummary, our industry contacts expect more M&As in 2015 as the sectorconsolidates and rationalizes portfolio and services to survive in a lower oilprice environment.