PetroChina Co Ltd

SSE:601857

Earnings Call Transcript 2021-Q3

[Wei Fang, executive]

[Interpreted] Good morning, dear investors and ladies and gentlemen. I'm Wei Fang, Deputy Head of the General Office and Secretary to the Board. Welcome to PetroChina's 2021 Q3 Results Conference Call. For the materials concerning our third quarter results, you can download it on our website and in your Shanghai Stock Exchange and Hong Kong Stock Exchange.

To begin with, I would like to give a brief introduction to PetroChina's team present in today's meeting. They are CFO and Board Secretary, Mr. Chai Shouping; Madam [ Pei Ying ] the Deputy Head of the Secretary to the Board; Deputy Head of the finance department, [indiscernible]. We're also joined by colleagues from finance department and international department. Now I would like to pass the floor to CFO, Mr. Chai Shouping.

[Shouping Chai, executive]

[Interpreted] Dear investors, ladies and gentlemen, good morning. It gives me great pleasure to join you virtually once again. On behalf of PetroChina, I would like to extend our gratitude to all shareholders and analysts for the long-term trust and support.

Yesterday, PetroChina, conveyed on both meetings, adopted the company's 2021 third quarter results and improved the confidence of a new Vice Chairman. Mr. Hou Qijun was appointed as the Vice Chairman of PetroChina. In the meanwhile, we [ improved ] our endeavors in things like ESG. We have made some proper adjustments to the committees under the Board.

In 2021, PetroChina take advantage of the favorable conditions in China's fast economic recovery, the rising market demand and international oil prices, coordinate our efforts in production operations for G&A efficiency improvements and ESG management. The oil and gas conductor chain has maintained stable operation with significant increase in other development efficiencies.

A number of highlights were reported in oil and gas exploration. We have recorded major breakthroughs and discoveries in key basins like Junggar, Erdos, Sichuan and Bohai Bay. Our reserve base is further expanded with a more consolidated resource base. We have seen improvement in both volume and efficiency in oil and gas production, refining petrochemicals and oil and gas fields, which have witnessed an ever-improving product mix, and we have -- take faster pace in new energy and new material business with green low carbon and digital transition making further headwinds.

All business segments of PetroChina remain profitable. In the first 9 months, net profit attributable to the parent is RMB 75.1 billion. This is the best in the past 7 years for the same period, and the company's investment value is further boosted.

PetroChina highly values green low carbon. In our transition, we have incorporated green low carbon into 1 of our 5 corporate strategies. In terms of green and low-carbon transition, the company will take a prudent approach to fully leverage our competitive strength to further increase the share from natural gas and chemicals in the total percentage, and we will coordinate the speed and efficiency and to push forward the development for photovoltaic and hydrogen and other energies in an ordinary manner.

Dear investors, COVID-19 pandemic is evolving around world, and there have been some divergence in terms of economic recovery across the world. We have seen that for major economies in the world, they have maintained monetary easing policies and a robust demand in the commodity markets. In particular, in China, our economic recovery is stable and it gained some momentum. There is still potential for growth in oil product markets, and natural gas demand registers fast growth.

The government has taken further measures to improve the business environment and promote fair competition. It has allowed a solid foundation for the company's further growth. We have every confidence that we could ride on the momentum and complete the annual targets, to remain committed to our original aspirations for rewarding our shareholders and fulfilling the corporate responsibility and deliver even greater performance to the shareholders.

Now I would like to invite my colleague to brief you on PetroChina's third quarter results. Thank you.

[Unknown Executive]

[Interpreted] Thank you, Mr. Chai. Now I would like to pass the floor to Fang, the Deputy Chief Representative for our Hong Kong office to brief you on our third quarter results.

[Wei Fang, executive]

[Interpreted] Now I would like to give you a brief introduction of PetroChina's third quarter results. In the first 3 quarters of 2021, the world economy is still recovering. But due to the repeated resurgences of COVID-19, the development of the economies are following a diverging trend. The international oil market demand is undergoing a fast recovery with the demand and supply [indiscernible], and international oil prices have continued to increase.

As domestic COVID-19 pandemic is put under effective control, the domestic macro economy is improving all along. The domestic refined petroleum product market, the demand is recovering and which has basically returned to the pre-pandemic level. Now the natural gas market in China has also registered fast growth. The company sees opportunity in the macroeconomic recovery by improving our oil and gas demand and international oil prices, taking the initiative to follow the target of carbon peak and carbon neutrality and energy transition. We have focused on the high-quality developments. We remain committed to the 5 development strategies of innovation, resources, markets, internationalization, green and low carbon; coordinate our efforts in COVID-19 response, production, operation, quality and efficiency improvements, innovation and reform as well as ESG.

We have continued our efforts in management to enhance our efforts in cost and increased control and maintain stable operation and production. Our operational performance saw a significant increase and maintaining a strong momentum. The 4 business segments remain profitable.

According to IFRS, in the first 3 quarters of 2021, PetroChina's revenue, RMB 1.88 trillion, up 31.8% year-on-year. Operating profit CNY 124.763 billion, up 107%; net profit attributable to the parent, CNY 75.126 billion, an average 2-year growth of 42%; basics earnings per share, CNY 0.411, a lot increased.

In the third quarter, PetroChina's revenue, CNY 683.76 billion, up 37.5% year-on-year. The operating profit, CNY 36.3 billion, adjusted for the proceeds from pipeline transactions last year, up 77% year-on-year. Net profit attributable to the parent, CNY 22.089 billion, adjusted for the pipeline transactions up 174.4%; earnings per share, CNY 0.121.

For Exploration and Production business segment. For our domestic business, we have pushed forward efficient exploration and profitable development. We stay committed to the low-cost development strategy, fully leveraged our advantage in resources, maintained a fast growth of natural gas production and take orderly steps to promote our new energy business.

For overseas business, we have focused on the COVID-19 prevention and control on an ongoing basis and actively promotes the key project -- production and operations. In the first 3 quarters of 2021, PetroChina's proved production, 660 million barrels, including 516 million barrels in China, up 0.3%. Marketable natural gas production, 3.3 Tcf, including 3.1 Tcf in China, increased by 7.9% year-on-year.

The oil and gas production, 12.1 -- 1.21 BOE, including 1.08 BOE in China, up 3.8%. Lifting costs, USD 11.36 per barrel, up 4.5% adjusted for exchange rates. In the first 3 quarters, operating profit for E&P segment, CNY 58.369 billion, up 191.8% or increased by CNY 38.369 billion.

In Q3, the company's crude production, 220 million barrels, including 190 million in domestic China, down by 0.3% year-on-year. Marketable natural gas production, 1 Tcf, including 977.1 billion cubic feet in China, up 10.7%. Oil output, 390 million barrels of oil equivalent, including 350 million in China, up 4.5%. In the third quarter, the OP of E&P segment, CNY 27.499 billion, up 185%.

For Refining and Chemicals business, we worked hard to control the refined products and increase the production of chemicals. We continued to lower the yields of gasoline and diesel and adjust the diesel/gasoline ratio in a flexible manner. We have maintained high utilization for key chemical facilities, including gasoline facilities and successfully put into operation the ethane to ethylene product in Changqing and Tarim. We further enhanced cost management control.

And with our units' processing costs continuing to go down, in the first 3 quarters of 2021, the process includes 910 million barrels, up 3.9%. The refined petroleum products, 81.327 million tons, up 1.4%, including gasoline, up by 10% and kerosene up by 28%. Gas, diesel, down by 11.0% year-on-year. Chemical commodities, 22.695 million tons, up 5.5%. The production of gas -- of ethylene, 4.756 million tons, up 0.9%.

In the first 3 quarters, the operating profit for R&C segment, CNY 31.99 billion, up CNY 33.658 billion, including CNY 20.133 billion in the refining business, up by CNY 28.403 billion. And for chemicals business, the operating profit, CNY 11.857 billion, up 79.6%, the best for the same period of this year.

In the third quarter, the company processed 310 million barrels of crude, down by 1.1% year-on-year, and we produced 26.42 million tons of refined petroleum product, down by 6%. Commodities, 7.97 million tons, up by 4% year-on-year. Gasoline outputs, 1.7 million tons, up 6.3%. In the third quarter, the operating profit for Refining and Chemicals segment, CNY 9.805 billion, up 20.5%. So breaking down for refining business operating profit is CNY 6.67 billion, up 24.2%. For chemicals business, OP is CNY 3.128 billion, down by 10.6%.

For our marketing business, we continue to enhance marketing and optimize the international trading business. We actually [indiscernible] the non-oil business operations that explore the building of integrated energy service platform, providing service, including oil, gas, hydrogen, electricity and non-oil business. We have successfully put into operation the first integrated energy service station in China.

In the first 3 quarters, PetroChina has sold 120 million tons of refined petroleum products, up 2.5%, increased -- and including 84.1 million tons of fuel in China, up 8.1%. For diesel -- for gasoline, diesel and kerosene, which registered a year-over-year growth of 10.4%, 1.5% and 36%. In the first 3 quarters, operating profit of marketing segment, CNY 8.776 billion, up CNY 14.712 billion.

In the third quarter, PetroChina has sold 43.3 million tons of refined petroleum products, down by 1.6%, including 40.5 million tons in China, up 4.3%. In the third quarter, our marketing segment registered an operating profit of CNY 2.136 billion, down by 73.2%.

For Natural Gas and Pipeline business, in light of the realities that China has witnessed, the solid demand for natural gas in [ both ] basin has robust demand in key basins. PetroChina has seized this opportunity and further expands the market with the sales of natural gas for a significant increase, providing clean and low-carbon energy for the low carbon transition. We continue to optimize the structure of the gas sources and try to bring down the purchase costs.

In the first 3 quarters of 2021, PetroChina has sold 198.7 bcm of natural gas, up 14.4% year-on-year, including 439.1 bcm in China, up 16.2%. In the first 3 quarters, the operating profits of Natural Gas and Pipeline segments is CNY 76.715 billion. Adjusting for the proceeds for pipeline transaction in this year and last year, the OP was up by 55.1%.

In the third quarter, PetroChina natural gas sales, 64.6 bcm, up 19.9%, including 41.9 bcm for domestic natural gas sales, up 12.8%. In fourth quarter due to higher import natural gas costs, the business segment suffered a loss of RMB 173 million. Adjusted for the proceeds from last year's pipeline transaction, our loss was cut by CNY 2.312 billion.

In this table, you can see target of 2021 and for October, for your reference. In the first 3 quarters, PetroChina has recorded a great operational performance. This is attributable to the fast recovery of China's economy and the rising of market demand as well as the R&D relating efforts made by [indiscernible] PetroChina.

The company will make amendments to the 5 development strategies for innovation, resources, market, internationalization, green and low carbon to further develop oil and gas as well as new energy resources to develop refining, marketing and new material lines in an efficient manner and continue to increase our supply of green, low carbon and affordable energy, continue to increase the company's operational efficiencies, market competitiveness and value creation capabilities so that we could create much value to the shareholders. Thank you all.

[Unknown Executive]

Now the floor is open for questions.

[Operator]

[Operator Instructions] The first question comes from Ms. [ Kelly Shi ] of Morgan Stanley.

[Unknown Analyst]

[Interpreted] With Morgan Stanley. Congratulations for the company's third quarter results. I've got 3 questions. First, my first question is about upstream production. We have witnessed our quarter-over-quarter decline for the company's upstream production, especially for natural gas. What's the reasons behind that? And what's your outlook for the Q3 production, given that, in Q3, it is a peak season for natural gas consumption.

My second question is about imported natural gas loss. What's the number -- imported number for the third quarter? And would you please to break it down, for example, what's the operating profit for the pipeline business -- for your investments in the pipeline business and for energy?

The third one is about PetroChina's downstream business segments compared with the second quarter. In third quarter, the refining business has -- saw an increase in operating profit, but for chemicals and marketing business, we saw a first all quarter decline. How do you look at it? And would you like to give some details on that?

[Unknown Executive]

[Interpreted] Mr. [indiscernible] from PetroChina [indiscernible] department will answer your first question. For the production decline in third quarter, actually, this is a quite normal thing because in the second and third quarter, it is the off-season power consumption. And through the second and third quarter, this is also a time for natural gas processing funds and other facilities to carry out turnarounds and maintenance to prepare for the winter gas supply. Therefore, we have witnessed some decline in the third quarter.

I'm pleased that we've added that -- the decline of production in the third quarter compared with the second one is mainly from the -- our overseas business, not mainly because of the OPEC's production cut combined and our service contracts. But for PetroChina's domestic production, actually, our crude production is flat with -- compared with the second one. And for natural gas business, our production picked up by 7.7%, a large increase compared with our plan in the beginning of the year, and we will track our every efforts to maintain the supply of natural gas.

[Unknown Executive]

[Interpreted] [ Mr. Wu ] from PetroChina's Finance Department will answer your second and third question. Actually, there are lots of reasons behind the imported natural gas loss. In the first 3 quarters, Natural Gas and Pipeline business segment has this opportunity of robust demand for natural gas in China, further expand our market and optimize our marketing structure. We work hard to explore more direct supply and direct sales customers and continue to enhance the marketing segment, marketing network in end-user markets, further improve the service to our customers and work hard to expand our sales and efficiency.

Actually, we have witnessed a significant increase for natural gas sales with operating profit, CNY 39.715 billion, down 36.4%. And this is also impacted partly by the pipeline transactions. Last year, the pipeline transaction proceeds, CNY 45.7 billion. And this year, the pipeline asset restructuring, CNY 16.98 billion. Adjusted for the proceeds from pipeline transactions, actually, we have -- saw a 55.1% increase.

In the third quarter, the business segment suffered a loss of RMB 473 million, and adjusted for the pipeline transactions, there is CNY 268 million quarter-over-quarter decline. That's mainly because that we have witnessed a higher equipment cost going for natural gas. As you may also know now, there is a 9-month time lag for the price of our imported natural gas. Last year, as international oil prices continued to increase, therefore, the cost is also going up.

In the first 9 months of 2021, we suffered a RMB 3 billion loss in importing natural gas. As I also just mentioned that because -- that's mainly because of the higher costs. And actually, on a year-on-year basis, our loss is declining. For the fourth quarter, driven by increasing in international oil prices, there will be higher natural gas costs as China will continue to enhance the supply price management to procure the resources in an orderly manner and try to control the average procurement costs and continue to explore the high end and efficient markets. In the meanwhile, we will also make full use of national policy to bring down our imported natural gas loss.

For your third question, as you rightly pointed out, our refining business for profit's up. And for chemicals and marketing business, there is a quarter-over-quarter decline. The first reason is a lower gross margin, especially for the chemical products. In the second quarter, the gross margin for chemical products is USD 377 per ton. And for the third quarter, the number is USD 360.

And for marketing business segments, there are also lots of reasons behind that. One reason is that we have embraced more fierce competition. In the first 2 months of the third quarter, there have been some large changes in the market and also compounded by the reemergences of COVID-19 cases. The sales volume has been [ down too ]. So due to that, the pricing/sales ratio was brought down, which leads to a lower gross margin.

[Operator]

The next question comes from Mr. Neil Beveridge from Bernstein.

[Neil Beveridge, analyst]

Just some more questions on the gas situation in China. Can you provide guidance for how big the losses are likely to be in the fourth quarter? That's my first question. The second question is, what do you think is your ability to pass the higher LNG prices that we're seeing at the moment, pass those costs on to customers with the winter gas premium and with sales above contracted volumes, where I think pricing is commercially negotiated between buyer and seller. And then the third question is really on the gas production volume. So you've seen a very strong year this year at 10% growth. I think over the long term -- medium to long term, you guided to 5% gas growth. Do you think it's likely that PetroChina will increase the domestic gas production and can sustain a higher level of growth going forward so we minimize gas import losses?

[Shouping Chai, executive]

[Interpreted] Mr. Chai Shouping, CFO, is answering your question. Regarding the importing natural gas loss, as [ Mr. Wu ] mentioned, that's mainly because of higher costs and we have suffered a loss from the second quarter. In the third quarter, the loss was RMB 6.4 billion. And for the first 3 quarters, to combine the second and the third, the total loss is CNY 3.2 billion.

As you pointed out that there is a high price for LNG, which is USD 23 per MMBTU. For PetroChina, most our contracts is long-term contracts, and we will sell them at a predetermined price. For the spot cargo, we will control the purchase of spot cargoes. And for those that within the contract, we will sell at a contract price. And for those volumes outside the contract, we will pass through costs.

As you also mentioned that we will further enhance the domestic natural gas production ramp-up. In the first 3 quarters, the natural gas production output registered a double-digit growth, which is 10% higher than our expected target 5%.

Increasing the domestic natural gas production is a fast way to lower down our imported natural gas loss. And this year, we have slightly allocated more CapEx to natural gas production in China to increase the natural gas production.

For domestic natural gas, we will further develop this kind of business, as it is a strategy for PetroChina and also of -- in order to promote green and low carbon transition. In the future, the company will further promote the disruptive development of natural gas production in light of the market and resources.

[Operator]

[Interpreted] The next question comes from Mr. Lawrence from BOCI.

[Lawrence Lau, analyst]

[Interpreted] With BOCI, I have got 2 questions. First, for the company's refining business in the third quarter, we have shown a quarter-on-quarter increase, which is outperforming your peers. So what's the reason behind this? The second question is about the company's [ ethylene ] projects. How competitive are these projects? And how much natural gas will the project cost for the company?

[Unknown Executive]

[Interpreted] [ Mr. Wu ] from PetroChina's Finance Department, is answering your first question. Regarding the refining business improvement compared to its counterparts, which registered quarter-on-quarter 29%, we actually do not see much starting into that as the statistics have just come out. But from PetroChina's perspective, for our Refining and Chemicals business, we continue to be market-oriented and post profitability and continue to increase the production and operation. And further control the production of refined products will increase the production of chemicals and further enhance more cost control.

Another reason is that for PetroChina, for refining business, our sales volume has -- saw a significant increase, including gasoline, kerosene and diesel.

And for our refining business segment, due to the increase of sales, our [indiscernible] inventory saw a significant decline. And according to our knowledge, and for Sinopec in the third quarter, many of its refineries were under maintenance. This might be driven behind the decline of operating profits.

[Shouping Chai, executive]

Mr. Chai Shouping, CFO, is answering your second question. Third quarter, PetroChina has produced 2 ethylene projects online including one 800,000 tons capacity in Changning and one 600,000 capacity in Tarim, and the 2 projects are all based on PetroChina's own technologies.

The 2 products is now in most operations with around 9% to 11% of return on investment within our expectation. And this is an [ exact ] measure for the company to further reduce the refined products, will increase the chemical products.

Despite there is a tight natural gas supply, there has no impact for those operation of the 2 projects.

[Unknown Executive]

[Interpreted] This concludes this conference call. If you have any questions, you can send it to our IR team. Thank you once again for joining us.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]