China Oil & Gas:Key takeaways from BofAML energy corporate day

PetroChina, Sinopec and CNOOC attended BofAML Energy and CleanEnvironmental Day May 26-27. Below are our key takeaways.

    PetroChina

    Gas price reform

    1Q15 had a weak gas demand, 2Q15 so far does not seem to have anysignificant improvement despite gas price adjustment in March, as April isstart of low season

    - While timing or frequency of gas price adjustment is not known, PetroChinawill suggest government to announce the linkage of gas price to oil price thistime

    Although gas price linkage may mean another gas price cut in the near term,PetroChina believes it will eventually benefit the company as a major holderof natural gas assets in China (85% of gas reserves, 80% of pipeline ownedby PetroChina)

    Pipeline spin-off

    It is more likely that PetroChina will still hold majority ownership as well asoperatorship in the spun-off entity

    100% sell-off to private investors is not a realistic option given thatpipeline has strategic importance of national interest

    China government will need PetroChina’s capability and expertise tobuild/ run pipelines

    Actual decision on the next steps has to be made based on consent frompartners

    E&P business

    Break-even oil price has been pulled down significantly mainly driven bylower cost

    Oil business was profitable at realized oil price of $48/bbl in 1Q15 vs$65-68/bbl (estimated) from last year

    Lifting cost was down for the first time since listing in 1Q15 by 3.7%,which was enabled by cost control measures taken from last year aswith oil price decline

    Actively searching for potential M&A opportunities as well as divestmentopportunities on existing international/ domestic projects in order to takeadvantage of low oil price and optimize asset portfolio

    BofAML comment: Gas price reform - There is a great deal of uncertaintysurrounding China’s next gas move and the scope of scenarios being consideredseems broad-based. On one end, we hear that the NDRC is working on a new gaspricing formula, which is similar to the European gas import contract prices, linkedwith various macro factors and a broad-basket of competing fuel prices, possiblyincluding coal prices in the context of China’s primary energy consumption.