PetroChina Co Ltd

SSE:601857

Earnings Call Transcript 2022-Q1

[Wei Fang, executive]

Dear investors, shareholders, ladies and gentlemen, good afternoon. I'm Wei Fang from Board office of PetroChina. On behalf of the company, I'd like to give a warm welcome to all of you attending the Q1 results announcement of 2022. On April 29, we held the meeting of the Board of Directors and supervisors and elected the candidate of Board of Directors and supervisors and also hired a chief geology. Also issued the reporting part of Q1 results of 2022.

Today, regarding our Q1 performance and key questions that include the market. We're going to have an online communication with analysts and fund managers online perhaps. Today, attending the conference call are: Executive Director and President, Mr. Huang Yongzhang; Executive Director of the company, Senior Vice President, Mr. Ren Lixin; CFO and Board Secretary, Mr. Chai Shouping. Mr. [indiscernible] of our funding department. And Mr. [indiscernible] director general of our production and operation management department; and Ms. [indiscernible] the Director General Offer International department. Also, we have our several colleagues from the selling department, finance department, production and operation management department, international department as well as the Board officer.

However, we have the first item on our agenda. The Executive Director and President, Mr. Yongzhang Huang would like to give some opening remarks.

[Yongzhang Huang, executive]

Thank you, Mr. Wei. Dear investors and shareholders, good afternoon. I'm more than pleased to meet with you online. First of all, on behalf of the Board of Directors, management and all PetroChina staff, I would like to extend my extended gratitude for your long-term attention and support. Entering 2022 faced with resurgence of COVID-19 and geopolitical complexities and volatilities as well as rising prices of oil and energy commodities. We maintained top priority of stability and proceed underground strategy achieved very good progress on our front. We provided very strong guarantee of natural gas supply amid the peak season and provided a very strong support for the green Winter Olympics. We deepen and with our growing and low carbon transition, continue to improve quality and efficiency and have a very good head start with very solid and strong performance.

Our production and operation indicators grew steadily on gas production and the increase outperformed most of our peers internationally. Currently, there are still much uncertainties in the global economic recovery and global energy landscape is faced with profound adjustments of these posed new challenges and higher requirement for us to keep up with the good work and improve corporate value. At the same time, we can all see that the fundamentals sustaining Chinese economic growth remain unchanged. The government attached great importance to development of energy companies and continue to pursue market-oriented reform in the energy sector and continue to build a unified national market and provide strong support for real economy.

All these provides more enabling environment and conditions for PetroChina's growth. In the past years, we have accumulated comparative advantages regarding oil and gas resources, management, technologies and talent. Therefore, we have strong confident about our future development.

On the annual results announcement held at the end of March, our Chairman, Mr. Dai Houliang proposed 9 requirements regarding how to truly accomplish our 2022 target. It is a guidance for the whole company to exert our efforts. PetroChina will always uphold the values of green development and reliable energy delivery to fuel the growth of customers and empower [indiscernible] and maintain strategic focus.

We will pursue new development in non-gas E&P a new achievement in refining and chemical transformation and upgrading for the optimization of the production, supply and marketing systems. New steps in our ongoing and low carbon transition, new breakthroughs in our R&D. We will actively guarantee the stable supply to meet oil and gas market demand and fully deliver on our environmental and social responsibilities, with even better and sound performance. We will continue to reward both our shareholders and the general public.

With persistence and due diligence we will definitely bring about a broader prospect. We sincerely hope that you can, as always, follow closely and support PetroChina's development. We look forward to join hands with you and [indiscernible] .

Now our colleagues from the Board office will give you a brief introduction of our Q1 performance. Thank you.

[Unknown Executive]

Thank you. Now we'll move on to the second item on our agenda. Now we have Mr. [indiscernible] representative of the company to review our 2021 -- 2022 Q1 results. At the same time, on the English line, we'll have representative from Hong Kong, Dr. [indiscernible] to give the same presentation. Now the floor is open.

[Unknown Executive]

Thank you, President. I would like to give a brief introduction of the PetroChina 2022 first quarter results. Oil and gas prices in the first quarter, the global economic recovery continues, but still facing uncertainty due to the impact of COVID-19, geopolitics and the monetary policy tightening in major companies. China's economy continued to recover steadily and is generally operating within a reasonable range. International oil prices rose sharply, influenced by supply and demand fundamentals and geopolitics. The average Brent spot price was $102 per barrel, up 67.3%. And the average WTI spot price was $95 per barrel, up 63.5%. Domestic refined oil market demand capital increasing in the first 2 months and declined in March due to COVID-19 impact. Natural gas market demand continued to increase.

Financial highlights. Facing the complex environment, the company made a stable development as top priority and achieved a steady increase in its operating results. Through integration of production and operation, market supply, technological innovation, management enhancement, safety and environmental production and epidemic prevention, PetroChina accelerated green and low-carbon transition, improved quality and efficiency and further strengthen ESG management. We're also committed to satisfying gas demand in peak season and provided clean energy to green Winter Olympic. According to IFRS, in the first quarter, the company achieved revenue of CNY 779 million, up 41.2%. Profit from operations of CNY 57 million, up 27.9%. Net profit attributable to owners of the company, CNY 39 million, up 40.9%. Basic EPS totaled CNY 0.21, up CNY 0.06 year-on-year.

For each segment, firstly, the E&P business achieved a steady growth in crude output and a rapid increase in natural gas output with an expanded ratio of gas in total production and enhanced the capacity of providing low carbon clean energy. In the first quarter, oil and gas equivalent outlook was 431 MMboe, of which domestic oil and gas equivalent output was 390 MMboe, up 4.5%. Domestic crude oil output was 192.6 million barrels, up 3.7%. Domestic marketable natural gas output was 1.2 trillion cubic feet, up 5.4%. Lifting cost was $10.8 per barrel, up 8.4% year-on-year, and it excludes the impact of exchange rate changes, up 6.2%, mainly due to the increase in costs such as fuel and power. The E&P business realized an operating profit of RMB 38.8 million, up 201%, mainly due to the increase in friction sales and realized prices of both oil and gas.

Refining and Chemicals. The company constantly promoted transformation and upgrading of Refining and Chemicals combines by optimizing product structure and increase in production of high value-added products, ensuring marketing supply and increase in profitability. In the third quarter, the processing volume was 302 million barrels, up 1.5%. Production of major oil products was 26 million tons, down 2.6%, of which gasoline production down 5%, kerosene production down 22.6%, and the diesel production up 4.8%. The refining business realized an operating profit of RMB 10.7 million, up 5.3%, mainly due to increasing prices of crude oil and refined products.

In the first quarter about Chemicals, the company produced 8.2 million tons of commodity chemical products, up 11.2%. The production of major chemical products increased significantly of which the production of ethylene was 1.96 million tons, up 21.8%. The chemical business recorded an operating profit of RMB 17 million, down $4.5 million mainly caused by rising prices of raw materials and a sharp decrease in gross profit.

Marketing. The company closely monitored the market and coordinated production and sales to ensure smooth operation of the industrial chain. The company also carried out various marketing activities to ensure supply and spring farming. In the first quarter, total sales of refined products was 35.3 million tons, down 2.7%. Domestic sales of refined products was 24.9%, up 3%, of which the sales of gasoline down 2.4%, kerosene down 21.7% and diesel up 16.3%. The marketing business achieved an operating profit of RMB 4.6 million, up 37.4%, mainly due to the rising prices of refined products, affected cost control, and increase in gross profit.

Natural gas marketing business. The company continued optimizing gas structure with efforts to control the procurement costs, [indiscernible] marketing strategies, rigorously deployed retail market and continuously improve customer service quality. In the first quarter, domestic sales of natural gas reached 60.6 billion cubic meters, up 10.9%. The natural gas marketing business realized an operating profit of CNY 8.9 million, down by 51.7%, mainly affected by combined impacts of rising cost of imported natural gas and pipeline restructuring of Kunlun Energy. The above is the company's main operating data in Q1 and the production target in 2020 for a reference. Thank you.

[Unknown Executive]

Thank you for the presentation. Now we'll move on to the Q&A session, and it will come with Chinese and English consecutive interpreting. And please inform which organization you represent before posing the question. [Operator Instructions]

[Operator]

[Operator Instructions] The first question is Zhao Nai Di from Everbright Securities.

[Nai Di Zhao, analyst]

And the first question is from Everbright Securities. First, I would like to congratulate on the very stellar performance in the beginning of the year. And we can see from announcement, the performance is very sound. I wonder if the management can share more information regarding the increase of your crude and gas production?

And second question, regarding the net profit increase of your respective business segment. Can you please shed more light on that?

[Unknown Executive]

Thank you for the question. Now President, Yongzhang Huang is taking your first question.

[Yongzhang Huang, executive]

In recent years, PetroChina continued to step up our E&P efforts. In 2021, our SEC for crude and gas equivalents was 147%, among which are for crude 221%, which is a record high since our listing. It is a very solid foundation for the production increase. In Q1, our oil and gas equivalent production 52.754 million tonnes, up 4.5% year-on-year, among which crude production in China, 26.066 million, up 3.7% year-on-year. Next about natural gas 33.49 Bcm, up 5.4% year-on-year.

I know that you probably give special attention to crude production. And the reason behind the 3.7% increase in crude is that, first, we enhanced the basic management of crude development and [indiscernible] development. Natural decline and comprehensive decline so far a decline, a decline year-on-year. Second, we carry out targeted measures to increase production and profitability in maturing blocks to improve our overall development. Third, in some major oil field such as Changqing, Tarim and Shenzhen, these are the most important areas for [indiscernible] reserves and production. We carried out profitable capacity building.

In Q1, we added a new capacity of 2.56 million tonnes, up significantly year-on-year. And the delivery rate was also accelerated, obviously, with production of new wells as well as daily production for single wells saw a steady increase.

I believe that answers your first question regarding oil and gas production. The second question will be answered by our CFO, Mr. Chai Shouping.

[Shouping Chai, executive]

And you can see that in Q1, with a very strong performance, net profit attributable to parent RMB 39 billion, up by 40.9% year-on-year. That mainly comes from 2 factors. First, with the increase of oil and gas prices and increased sales; and second, with ever more efforts in our campaign to improve quality and efficiency.

So as my colleague brief you, the oil prices increased significantly and also oil production at 2.7% and gas 5.4. At the same time, we further optimize our corporate management and we contain to improve quality and efficiency added an actual of CNY 4 million in profits. And these net profit, you can see that are coming from our business segments, all 4 arms turned a profit. In terms of operating profit, E&P segment CNY 38.7 billion. Refining and Chemical CNY 10.7 billion, and marketing segment, CNY 4.5 billion, and natural gas CNY 8.9 billion. And E&P segment remains to be the major profit contributor. Thank you.

[Operator]

The next question is Horace Tse from Credit Suisse.

[Horace Tse, analyst]

I have two questions. First about the losses in imported gas in Q1, and you share some information about that. And regarding the next few quarters, do you have any outlook, especially against the backdrop of the high oil price.

And my second question is that after the heating season, how do you plan to pass on the cost of your import? And regarding natural gas, how do you plan to achieve a markup?

[Unknown Executive]

Mr. Chai Shouping is taking your questions.

[Shouping Chai, executive]

About our imported natural gas, in Q1, [ imported ] 21.2 Bcm with a tax refund of RMB 3 million and a net profit of CNY 3.47 million and profit per cubic meter, RMB 0.164. You can see that we achieved a very effective loss control about our natural gas imports in Q1. Now we have entered Q2. And in Q2 and following Q3 and Q4, the natural gas marketing is entering an off-season. Under such instances we will further tighten our control regarding import gas lot and to carry out various efforts and measures accordingly.

Due to the COVID-19 pandemic as well as the Russia-Ukrainian issue, the international oil prices remain high and so is natural gas. And the cost of our natural gas import is increasing with a lot of uncertainties going ahead. And PetroChina will continue to carry out various measures to call for the situation and meet market demand.

We will import flexible marketing strategies. First we will actively explore direct sale and end-user consumers. Second, we'll build the system for natural gas supply and purchase contract negotiations. Third, we will increase the online trading of [ unprotected ] resources. With market-based measures, we will try to reduce import gas losses.

Regarding your second question, since there is an increase of both the import gas costs and the overall prices, we expect to see higher prices domestically than that last year. Thank you.

[Operator]

The next question is [indiscernible] from Morgan Stanley.

[Unknown Analyst]

I have two questions. First, a question on imported natural gas. What is your estimate about the tax refund in Q2, Q3 and Q4? And what do we expect of the import LNG cost?

And my second question is about refined product demand. Entering April, we see that with COVID resurgence, there could be a quarter-on-quarter refined product demand decline and what do we expect of the whole year level? Do you still expect a year-on-year increase with current circumstance.

[Unknown Executive]

Mr. [indiscernible] from the Finance Department is taking your first question.

[Unknown Executive]

About the tax for imported natural net gains, it will be 33% of the value-added tax. Therefore, the specific amounts will be indexed to the natural gas prices as well as the [indiscernible] volume. Since our import gas prices is indexed to oil prices with 9 to 12 months less, we expect that Q2 to Q3 import gas costs will be higher than that of Q1. Therefore, we expect that in Q2, Q3 and Q4, the tax refunds in terms of absolute volume will be higher than that of the first 3 months. However, the specific amounts will be determined by the oil price changes. As for the import gas cost of 2022, we do expect a large increase compared with that of last year. And the specific amount will be dependent on the oil price changes in the coming months.

And your second question. About the refined product demand actually in Q1, total national demand in terms of apparent consumption was around flat from that of last year with slight difference between different types of refined products. And diesel saw a rather large increase. But kerosine saw a very large decline. That is mainly due to the COVID-19 impact. And from the whole year, China's economic growth is still maintained in a very appropriate range. Therefore, we expect that the whole year consumption as per last year we will maintain an upward trend. Thank you.

[Operator]

The next question is Lau Cho Ming from BOCI.

[Lawrence Lau, analyst]

I have two questions. First, in terms of our imports from Russia with both oil and gas, how do you carry out the assessment for now with what kind of covenants.

And my second question is that I read from the news that India is demanding discounts of its energy imports and I wonder if we have the opportunity to demand a cheaper import from Russia.

[Unknown Executive]

Mr. Chai Shouping is taking your question.

[Shouping Chai, executive]

Currently, our operations with Russian counterparts are being executed according to the presigned contracts, and they are proceeding normally.

Previously, our oil and gas operations with Russian companies are sometimes settled with U.S. dollars and sometimes with euros. As for now, due to assumptions and some other factors, the settlement was impacted to a certain extent. But the overall proceedings and operations are still normal. As of now, PetroChina do not have any plans or arrangement to acquire discounted price on oil or gas. Currently, we are just executing pre-signed contracts.

[Operator]

The next question is Toby from Citibank.

[Toby Shek, analyst]

I have two questions. First, to follow up on what Mr. Chai Shouping just answered about the natural gas direct sale and end user markets. I would like to ask what is the proportion of this part of operations in your total natural gas sales?

And my second question is that you just talked about the resurgence and impact of Q2 COVID situation. I wonder if you have adjusted your utilization ratio of refining and chemical plants to cope with the current soft market.

[Unknown Executive]

Mr. [indiscernible] from the production operation management department is taking your question regarding natural gas sales.

[Unknown Executive]

In Q1, natural gas sales within China 60.6 Bcm, up 10.9%. And during the same period, the current consumption within China, 93.2 Bcm, up 0.5%. Therefore, it is apparent that our increase far outperformed that of the total increase nationally. Also, you can see from the market structures, we are boosting our efforts in end-user marketing. In Q1, the end user marketing volume accounts for about 28%. Thank you.

[Operator]

The next question is Amily Guo from UBS.

[Amily Guo, analyst]

My two questions are all about Refining and Chemical arm. First question, in Q1 due to the higher oil prices, we see a narrowing gross margin of your Chemical business. And what is your expectation regarding the profitability of Chemical and Refined products.

And second, we see a decline in the inventory of refined products and the government has halted the exports of refined products. If the inventory climbs in later months, do you expect that the government will reallow the exports of refined products.

[Unknown Executive]

Mr. [indiscernible] is taking your questions.

[Unknown Executive]

About the profitability of our chemical segment in Q1 due to the high oil price, there is a high cost of the feedstock for the chemical plant. Therefore, the chemical operations are striking a balance. Informed by the market realities, we adjusted the utilization ratio of our chemical plants and product mix. And these efforts saw very good results. We expect that crude and natural gas will remain high in terms of prices going into Q2. And feedstock and processing fee of our chemicals will remain high. And that will press down the profitability of our chemical operations. Also, there is a resurgence of COVID-19 within China. And that hurts the consumption.

Therefore, there will be even more intense competition in the chemical market. Later, we'll carefully analyze the market changes and adjust our product mix accordingly to drive down procurement costs of the feedstock as well as the processing fee so as to improve the profitability of our chemical operations.

For now, the inventory for refined products compared with that of the beginning of the year remains rather high. On the 1 hand, based on market realities, we boosted our marketing efforts to increase sales volume. On the other hand, we further refined our Refining and Chemical product mix, made in time adjustments to our refining capacity and utilization ratio. And we also arranged appropriate exports of certain products with strict abidance to relevant authorities and export protocols.

For now, the crude industry is operating smoothly with a good balance between production and marketing. With the improvement in the COVID situation lately, we see that the inventory is going down. In the future, as COVID-19 die down and macro economy picks up, we believe that the crude value chain will operate even more smoother. Thank you.

[Unknown Executive]

In the increase of time, now we'll have the last question, please.

[Operator]

The last question is from [indiscernible] BAM Funds.

[Unknown Analyst]

My two questions are about the upstream. First, in Q1, I wonder what is your all-in cost for crude. And for the remainder of the year, what do you expect of your crude production cost?

And second, since the oil prices will be higher than that of last year, do we expect to see a very high IRR this year over 100% or even 200%, likely.

[Unknown Executive]

Mr. [indiscernible] from the Finance Department is taking your questions.

[Unknown Executive]

In Q1, the crude operating cost, CNY 10.82, up by 8.4%. That within China was 11.24%, up 7.5% year-on-year. And that mainly comes from 2 reasons. First, the changes in exchange rates up CNY 0.20. And second, the price hike of materials and power added to more than CNY 0.50. We will see that in Q1, the prices of both commodities increased significantly, and so is that our [ energy ] and power. According to Chinese Bureau of Statistics, the PPI in Q1 increased by about 8.5%. And the price hike of oil and gas field companies, their procurement of materials and power will see a higher increase. That is the 2 most vital issues behind the cost increase. And PetroChina always adhere to the principle of low-cost development strategies.

Besides this, we did factors in terms of controllable costs, you can see that there is still a decline. And second, about the about of the E&P sector. In Q1, the operating profit of our E&P segment, up 200%. That comes partly from the 55% increase of the realized crude price. And also, there is such as Mr. [indiscernible] briefed you, there is an increase of our production and sales upstream.

Meanwhile, that also narrowed our efforts to drive down cost, improve quality and efficiency of the entire staff. And throughout the year, we expect the oil price to be higher than that of last year and remain at a high range. And we do foresee a better performance of the upstream segment compared with that of 2021. Thank you.

[Unknown Executive]

Also this year, with Mr. [indiscernible] would like to add a few words.

[Unknown Executive]

Also this year, with the higher oil prices, we are going to boost our E&P efforts just as our executive briefed in this conference and against the high oil price environment and the new supply and demand we strive to make more E&P deliveries to better suffice the market.

And now I would like to thank Mr. [indiscernible] and as well as other colleagues from different departments for attending this conference call, and it has come to a close. If you have further inquiries, you are more than welcome to contact our Investor Relations team in both Hong Kong and Beijing. Thank you all for your time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]