PetroChina Co Ltd

SSE:601857

Earnings Call Transcript 2019-Q2

[Wu Enlai, executive]

Ladies and gentlemen, good afternoon. Welcome to PetroChina 2019 Interim Results announcement.

First, please allow me to introduce my colleagues today. Mr. Hou Qijun, Managing Director and President; Mr. Chai Shouping, CFO; Mr. Ling Xiao, Vice President; Mr. Yang Jigang, Vice President.

The announcement today includes remarks by President, a financial performance review and analysis of first half '19 and an operational performance outline of first half '19 and outlook for the second half.

Now the floor be given to Mr. Hou Qijun.

[Qijun Hou, executive]

To guests, ladies and gentlemen, friends, good afternoon. I'm pleased to see you all here. First, on behalf of PetroChina Board and management, I welcome you all to the announcement. Much thanks to all dear investors, analysts and friends from the press for your continuous attention and support.

This year, there have been bigger oil prices volatility and more fierce market competition. The company focused on robust growth and high quality development, optimized production, planning an adjusted structure, enlarged international oil and gas cooperation and worked for cost down and profit up.

Oil and gas business, both saw smooth operation. First, operational effectiveness grew steadily.

We realized a revenue CNY 1.2 trillion, up 6.8% year-on-year. Operating profit, CNY 70.66 billion, up 4.9% year-on-year. Net profits attributed to parent company shareholders, CNY 28.42 billion, up 3.6% year-on-year.

The company keeps a stable financial status.

Second, production and operation was steady and well controlled. The company accelerated exploration and development, increased risk, exploration and made strategic discoveries in Mahu of Junggar Basin, Longdong of Ordos Basin, Kuqa Bozi-Dabei of Tarim Basin, Volcanics of Sichuan Basin. The company domestically produced 0.67 billion barrels of oil equivalent, up 5.5% year-on-year, in which crude oil output hiked 1.6%, up again after declining since 2014.

Gas output hiked 10.7% year-on-year and continued a strong momentum. Overseas oil and gas net production was 0.105 billion BOE, up 8.1% year-on-year, domestic gas sales hiked 7.5% year-on-year.

Third, structure adjustments saw early results, domestic gas output took up another 2.1 percentage points year-on-year in production of oil equivalent. In refining business, diesel gas ratio went down by 0.16%.

Aviation fuel and other premium products took up another 1.4 percentage points year-on-year, chemical products, up 5.2% year-on-year, ethylene production grew by 11.8% year-on-year.

Fourth, foundation for development became stronger. R&D innovations continued to lead and support the business, more has been done to proceed with key R&D projects with progress in various key general techniques and a making of strategic products.

The company deepened internal reform and made progress in building the shared service centers and market-based operation mechanism. Our efforts on safe and clean production and fulfilling CSR were effective and laid solid groundwork for high-quality, sustainable development. Those achievements will not be possible without your attention and support. On behalf of the board and management of the company, I extend my gratitude to you.

The company still faces complex situation for business. In second half '19, we will analyze this situation more carefully and work hard for robust growth. As oil and gas demand is solid and growing, we will prioritize upstream business to pave way for development, handle overcapacity in refining and take off fierce competition in refined oil, shop in our agile resources in gas market, optimize production planning to enhance quality and efficiency so as to realize the production targets of this year.

The company will increase E&P efforts for bigger reserves and production, more will be done for domestic exploration and development, increasing reserves and production and faster capacity building. We will deepen cooperation with the Belt and Road countries, closely follow key overseas projects, trying to outperform the all year production targets. The company will move faster to operate refining and chemicals business, profit based principles will guide our resources allocation, drive the product mix of less petrol and more chemicals and lead to stronger competitiveness and profitability in this segment.

We will work hard to increase oil and gas sales for higher profit, plan for a bigger market share, bigger [indiscernible] retailing volume and higher profit, expand premium gas market, direct supply uses and retail to stabilize supply and increase volume and profit.

We will continue to reform for innovations at a market-based mechanism, enhance self-innovation for the breakthrough in various strategic and revolutionary techniques, let R&D innovations solve production problems and drive profit and high quality development.

Ladies and gentlemen, friends, I hope the company will continue to have your attention and support.

Working together, we will see a brighter future.

Next, my colleague will show you the company's financial performance in first half '19. Thank you.

[Shouping Chai, executive]

Thank you, President. Now I'll walk you through the finance review for first half '19.

In first half '19, the company realized revenue, CNY 1.2 trillion, up 6.8% year-on-year. Operating profit, CNY 70.66 billion, up 4.9% year-on-year. Net profit attributed to parent company shareholders, CNY 28.42 billion, up 3.6% year-on-year. EPS, CNY 0.155, up CNY 0.005 year-on-year.

The company reviewed international oil prices. And this is outcome to optimize investment mix.

CapEx in first half '19 was CNY 83.95 billion, up 12.5% year-on-year.

Overall CapEx was well under control. E&P is essential to PetroChina's development and remains a key CapEx area. CapEx for E&P was CNY 69.38 billion, taking 82.6% of total CapEx and up 4.4 percentage points year-on-year.

The company worked hard to achieve cost down and profit up.

In first half '19, we achieved following oil and gas per unit lifting cost, $11.1 per barrel, down 2.4% year-on-year.

Refining per unit processing cash cost CNY 163.47 per ton, up 3.4% year-on-year due to bigger power and other expenses. Per ton marketing cost CNY 303.02 per ton, up 4.8% year-on-year.

We worked hard to make proper investment to reduce debts' interests for a better debt mix.

Financial performance was generally stable. By June 30, total assets, CNY 2.64 trillion, up 8.1% versus the end of last year. Interest-bearing debt, CNY 444.69 billion, up CNY 30.12 billion or 7.3% versus the end of last year. Debt ratio of 45.9%, up 3.6 percentage points versus the end of last year. If excluding the effect of new leasing criterion, it was almost the same as last year.

We pay much attention to cash flow management with the FCF being CNY 15.27 billion. Cash flow from operating activities, CNY 134.43 billion, down CNY 13.44 billion or 9.1% year-on-year. FCF, CNY 15.27 billion, down 69.5% year-on-year, mostly due to bigger E&P input, cash CapEx and changes in working capital. The company will improve capital management to secure a healthy cash flow that cushion the company's development.

For E&P segment, the operating profit was CNY 53.63 billion, up CNY 23.74 billion year-on-year and remains a major profit contributor.

Due to oil and gas product price changes, profit up CNY 9.73 billion. Crude average realized price was $62.85 per barrel, down 4.5% year-on-year. RMB average realized price up 1.6% year-on-year. Due to oil and gas sales changes, profit up by CNY 16.1 billion, in which a bigger oil sales increased profit by CNY 11.14 billion.

Bigger gas and shale gas sales increased profit, CNY 4.96 billion.

Due to bigger operating expenses and others, profit went down CNY 2.9 billion, in which more purchases led to profit down CNY 12.13 billion, DD&A reduced and profit went up CNY 8.9 billion.

For Refining and the Chemicals segment. The operating profit was CNY 4.97 billion, down CNY 19.7 billion year-on-year.

For refining business, the operating profit was CNY 1.38 billion, down CNY 17 billion year-on-year.

Due to a smaller refining gross profit, profit went down CNY 27.66 billion. Due to more crude runs, profit up CNY 1.48 billion, other expenses reduced, profit went up CNY 9.16 billion. For chemicals business, the operating profit was CNY 3.6 billion, down CNY 2.7 billion, in which price changes led a profit reduction by CNY 8.5 billion, sales changes led to profit growth of CNY 8.9 billion, more operating expenses, led to profit reduction by CNY 3.1 billion due to more purchases, services and others, profit down by CNY 3.54 billion.

For Marketing segment, the operating profit was CNY 1.897 billion, down CNY 2.6 billion year-on-year due to domestic refined oil oversupply, low price realization rate, domestic marketing business saw a loss of CNY 2.099 billion, up CNY 3.15 billion year-on-year, in which a lower gross profit led the profit down CNY 2.1 billion. Operating expenses changes led to profit down CNY 1.046 billion, mostly affected by new leasing criterion.

Operating profit from international trading, CNY 3.996 billion, up CNY 0.557 billion year-on-year.

For natural gas pipeline segment. Operating profit, CNY 18.3 billion, up CNY 2.2 billion or 13.6%.

On gas sales, the loss was CNY 1.08 billion, down CNY 1.93 billion year-on-year. The average domestic city gate price was $7.8 per thousand cubic feet, up 3.7% year-on-year. Domestically produced gas profit, CNY 10.12 billion, down CNY 0.28 billion.

Imported gas and LNG loss, CNY 11.2 billion, down CNY 2.21 billion year-on-year. Profit from pipeline transmission, CNY 19.1 billion, up CNY 61 million year-on-year. Profit from city gas CNY 4.47 billion, up CNY 0.167 billion year-on-year.

Less operating expenses led the profit up by CNY 36 million.

The return for shareholders has been on our agenda with a stable rate of dividend payout.

Since 2016, as oil prices went down the company has made dividend payment at IFRP based 45% of net profit parent company plus special dividend as benefits for shareholders, therefore, the board recommends an interim dividend of CNY 0.07765 per share at a 50% rate.

As we follow IFRP rules, for 45% of net profit attributed to parent company in first half '19, CNY 0.06988 per share plus special dividend CNY 0.00777 per share.

Next, Mr. Ling Xiao, will present the first half '19 operating performance and outlook for second half '19.

[Xiao Ling, executive]

Thank you. Mr. Chai Shouping.

Now I will brief you on the operational performance of H1 2019, and our outlook for H2.

In H1 2019, faced with escalating Sino-U.S. trade frictions, mounting downward pressure in China, large fluctuations of international oil prices and intensifying market competition, PetroChina adhered to the principle of prudent development and qualitative [indiscernible], further cut costs and added profits. Thus, we maintained stable and small operation of oil and gas business chains with production indicators better than expected and performance improving steadily.

In first half of 2019, our performance improved steadily. In China, E&P made many new breakthroughs with stable production growth.

Overseas E&P achieved more results. Major projects are coming online. Progress was made in producing less petrol and more chemicals. Transformation and upgrading picked up pace. Sales structure of oil products was further optimized. International trade saw steady growth. Gas sales climbed in volume and profits. Partner network maintained smooth operation.

In China, H1, PetroChina sped up E&P enhanced risk explorations widely deployed preliminary prospecting and made 36 achievements. We're focus on Southwest Shale gas, Xinjiang Mahu and Jimsar, Daqing Oilfield and other key projects to boost production which enabled a rebound in oil production and fast-growing natural gas, especially risk explorations made remarkable breakthrough.

In Junggar Basin, Gaotan Well 1 had a daily output of 1.21000 cubic meters of oil and 320,000 cubic meters of gas, a new single-well record in [ classolite ] structure.

Total yield during production test was 50,000 tons, explorations in deeper layers of fossil part was sped up, identifying 30 target traps and planning 50 evaluation wells.

In Tarim Basin, Kuqa Bozi-Dabei region found 6 new gas bearing structures with the potential of trillion cubic meter gas reserve.

Comprehensive evaluations in Qiulitage was accelerated also eyeing new discoveries.

Petroleum explorations in [indiscernible] made new progress and located CNY 33 million tons of [indiscernible] reserve.

In Qingcheng, Longdong, Changqing stratum [indiscernible], YC 7, we found the largest shale oil reservoir in China. Newly added P1 and P2 reserves exceed 1 billion tons.

In volcanics of western Sichaun Yongtan 1 well, first section saw industrial gas flow of 220,000 cubic meters, with more gas reserve found in the second section, revealing greater potential.

In Longnvsi structure, well Moxi 129H in stratum [indiscernible] had a daily production of 1.41 million cubic meters, thus the high-quality reservoir in [indiscernible] continued to extract in size. In Songliao Basin, [indiscernible] well 1 produced 115,000 cubic meters of gas per day. Bedrock explorations in ancient uplift of [indiscernible] section were very fruitful.

Overseas E&P gained more results with many major projects coming online.

PetroChina sped up independent exploration projects. In Chad, wells in Doseo Basin saw high-yielding oil flows and thick oil layers, hopefully leading to 100 million ton reservoir.

In [indiscernible] of Southeast Bongor Basin, all 6 wells proved successful, also promising 100 million tons.

In Aktobe Kazakhstan Central Block in Pre-Caspian Basin eastern slope carboniferous system broke new ground. PK project in South Turgay Basin made 3 new discoveries.

We also optimized development concepts. Chad 2.2, Halfaya III and other key projects went smoothly online, production overseas grew steadily.

In H1, PetroChina produced 452 million barrels of crude, up 3.2%. Output in China, after 4 years of declines saw a rebound of 1.6%. Marketable natural gas totaled 1.96 Tcf, up 9.7%, in which production in China went up by 10.7% which was the first 2-digit growth in nearly 10 years.

Oil and gas totaled 779 million BOE, up 5.9%. Production in China grew by 5.5%. And that overseas went up by 8.1%. Production overseas account for 13.5% of the corporate total.

Progress was made in producing less petrol and more chemicals, transformation and operating picked up pace.

In H1, PetroChina embraced market changes, improved resource allocation and adjusted product mix. We processed 597 million barrels of crude, up 3.1%, produced refined products totaling 56.72 million tons, up 4.3%. Gasoline and kerosene went up 11.2% and 12.6%, respectively, diesel down 3.1%. Diesel gasoline ratio down to 1.06%.

Chemicals commodity totaled 12.64 million tons, up 5.2%. Ethylene plants maintained high utilization ratio, producing 2.98 million tons, up 11.8%. Also we sped up transformation and upgrading projects. North China chemical plant concluded renovation and went downstream, Guangdong integrated refining and chemical plant, Tarim [indiscernible] [ ethane ] to ethylene plants started construction.

As for oil products and trade. In H1, PetroChina rose through the challenges of declining consumption and cost-competitive local refineries brought marketing closer to production, limited external procurement and ensured the smooth operation of petroleum industrial chain.

We focused on precision marketing to increase sales and cut stock in key regions.

In H1, PetroChina sold 89.91 million tons of refined products, down 1.1%. Gasoline and diesel dropped 2.6% and 1.5%, respectively, while kerosene grew by 7.5%. Sales in China totaled 57.58 million tons, down 1.7%, in which retail increased by 0.9%.

Now PetroChina operates 21,856 gas stations. As for trade, we enhanced the coordination between imports and exports and explored premium markets overseas.

In H1, we exported oil products totaling 8.8 million tons, up 8.9%. Total trade volume, 220 million tons, up 18.9%.

As for natural gas, sales climbed in both volume and profits. Pipeline network maintains smooth operation.

In H1, PetroChina continued to improve resource allocation, prioritize the sales of home produced gas, fine-tuned the timing of LNG and P&G imports, enhanced mutual supply with partners and strengthened online trading.

In H1, we sold 125.27 Bcm of gas, up 23.5%. Sales in China, 84.29 Bcm, up 7.5%. Key projects are well underway. No section of Power of Siberia pipeline is being completed, and middle section has started constructions, Fujian-Guangdong branch lines inter-connectivity projects and Shenzhen, Tangshan

Jiangsu LNG terminals are also proceeding as planned.

In H2, PetroChina will remain committed to prudent development principle and work on the following aspects.

In China, we will increase reserve, production and profits at full throttle, better implement already deployed risk explorations, build on our current progress to locate large and recurrable reservoirs, push forward key capacity building projects, make sure we fully realize the annual oil production targets, optimize gas field development, work on the operation of shale gas projects to boost production and tighten control over costs so as to increase reserves, production and profits.

And secondly, we'll consolidate the development and operation of new projects overseas, deepen cooperation in countries along the Belt and Road, strive for large reservoirs and strategic reserve replacement. For existing projects, we'll add capacity, stabilize and boost production, build on our current success overseas.

Third, in refining and chemical business, we will continue to restructure, cut cost and add profits, plan and implement high-quality development, move ahead with transformation and upgrading, improve overall competitiveness and economics.

Fourth, for marketing, we will improve sales and profitability of our products, enhance coordination and cooperation between subsidiaries, focus on retail and profits, employ various methods to explore high-quality marketing networks in strategic regions.

And fifth, regarding gas sales, we'll maximize profits, refine resource allocation, coordinate between home produced and imported gas, give more preferential treatment to premium markets, prioritize the sales of home produced gas, employ differentiated marketing strategies and expand online trading through exchange centers to push our prices and boost profits.

And sixth, we'll advance reforms and innovation, focus on deep player and shale E&P, EOR refining and chemical transformation and upgrading and other core technologies, work on problem shooting in major projects, enable integrated promotion and application of technologies.

And here, it shows the data about our business operation of H1 for your reference.

Ladies and gentlemen, in the second half, we'll continue to deepen reforms, speed up technical innovations, drive for high-quality development and bring better returns to our shareholders.

Thank you all.

[Statements in English on this transcript were

Spoken by an interpreter present on the live call.]