PetroChina Co Ltd

SSE:601857

Earnings Call Transcript 2022-Q3

[Hua Wang, executive]

[Interpreted] Ladies and gentlemen, good afternoon. I'm Wang Hua, CFO and Board Secretary of PetroChina. Here on behalf of the company, I would like to welcome you to our 2022 Q3 earnings call. First, allow me to introduce attendees from our Beijing headquarters: Mr. Huang Yongzhang, Executive Director and President of the company; Ms. Wu Shouping, Director General of our Finance Department; Mr. Le Chang, Deputy Director General of our International Department; Ms. Pei Ying, Deputy Director General of the Board office; Ms. Liu Wangpao, Deputy Director General of our Planning Department; Mr. Sun Wu, Deputy Director General of our Production Operations Management Department; Ms. Zhou Goupong, Deputy Director General of our Law & Corporate Reform Department; and Mr. Liang Gang, Deputy Chief Economist of our Board office.

Today's earnings call will include 3 parts. First, opening address of our President, Mr. Huang Yongzhang; second, briefing of our Q3 performance followed by the Q&A session.

Now we'll move into the first part, opening address of our Executive Director and President, Mr. Huang Yongzhang. Please.

[Yongzhang Huang, executive]

[Interpreted] Dear shareholders and investors, good afternoon. I'm more than delighted to join you online. First of all, on behalf of the Board, management and our staff I would like to thank you very much for your long-term support and attention.

This year, faced with hardships and challenges, PetroChina have always maintained strategic focus and follow the deployment of our Board of Directors. We coordinated between operation and management, as well as reform and innovation, continue to optimize oil and gas industry chain and our profitability continued to increase. Revenue, net profit attributable to parent, free cash flow and many other operation indicators for a large increase and our performance recorded another historical fact. All major tasks have seen new headwinds and new success.

First, we continue to step up E&P assets and maintained a sound momentum in production and reserve ramp-up. We secured 17 important discoveries and 31 major programs in Sichuan, Tarim, Erdos and Junggar basins. We have achieved steady crude output with increased and the rapid growth of natural gas domestically. For overseas operations, we further optimize layout and portfolio major projects to smooth progress.

Second, we further carried out restructuring and upgrading of our refining and chemical business and worked hard to cut fields and increase chemicals and specialty products. Our key projects like Guangdong Petrochemical Complex and saline-alkali plant also new programs and our product mix continue to optimize. We've based market-oriented and profit centered to carry out improvement in terms of our crude resource allocation to make appropriate arrangement in terms of run rate and further cap our cost and expenditures.

Third, we further worked on fine management and improved our marketing. Refined product sales overcame challenges like declines in market demand and further improved customer service to expand sales. Our market share saw steady increase. In terms of natural gas marketing, we optimize resource structure to contain procurement costs and improve marketing strategy and resource allocation to maintain a balance between guaranteed supply and profitability.

Fourth, we made further efforts in green and low carbon transition. We have worked on major integrated bases with wind, solar, gas and energy storage, as well as the 6 major bases and 5 major projects of new energy and new materials endeavors. We have made active efforts to develop clean energy and power markets in areas with abundant wind, solar and geothermal resources. We have also launched a batch of new energy and new materials projects. More than 10 projects have been completed and brought online. For example, the floating PV demonstration base in Daqing oilfield.

Fifth, we continue to enhance R&D and work on the building of original technology incubator to enhance basic research and applied research. We have accelerated the campaign to break technical bottlenecks in terms of core technologies, so as to build a world-class innovative enterprise and provide support and guidance for our business development.

Sixth, further efforts in quality and efficiency improvement, we will continue to improve the value creation capability of our oil and gas industry chains. We stick to the principle of disciplined, targeted and cost-effective investment to cap the overall amount of investment and improve investment management. Based on macro environment as well as the realities in our production and operation, the Board of PetroChina has deliberated and approved the adjustment of our business development and investment plan which will further consolidate the resource base of future production and reserve ramp-up and preceded the refining and chemical sector upgrading and transformation. And also to speed up the business development in terms of new energy and new materials

For the next step, PetroChina will closely follow domestic and international situation as well as the dynamics in the oil and gas market and changes in interest rate and exchange rate to optimize the organization of our production and management, deepen quality and efficiency improvement as well as reform and innovation to fend off risk in our business operations and achieve the annual production and operation targets, so as to create more value for our shareholders and the society at large. Thank you.

[Unknown Executive]

[Interpreted] Thank you, Mr. Huang. Now we'll move on to the second item. We will have our securities representative and deputy chief economist of the Board office, Mr. Liang Gang, to introduce the Q3 performance. At the same time, on the English line, we have Mr. Brian Xing from Hong Kong representative office to introduce the performance in English.

[Unknown Attendee]

Good afternoon, ladies and gentlemen. I will give you a brief introduction of PetroChina's 2022 third quarter results. In the first 3 quarters, while the economy continued to grow slowly due to geopolitical tensions, inflation, rate hikes in the U.S. and Europe and recurrent COVID-19 epidemic, the tight supply and demand balance of the international crude oil market led to a spike in crude oil prices. China's macro economy gradually recovered. Domestic refined oil demand declined due to sporadic epidemic outbreaks in some regions.

The company implemented a new development philosophy and high-quality development requirements, pursue the progress while ensuring stability complied with laws and regulations, we overcame challenges and coordinated epidemic prevention and control, production and operation, reform and development rigorously expanded our exploration and development and ensured stable oil and gas supply.

We positioned efforts to enhance the development quality and efficiency. We continuously improved our value creation capability. In accordance with IFRS for the first 3 quarters, the company continued to deliver record financial results for the same period. Revenue was RMB 2.4 trillion, up 30.6%. Operating profit was RMB 175 billion, up 40.2%. Net profit attributable to owners of the company was RMB 120 billion, up 60.1% and basic EPS RMB 0.66 up RMB 0.25.

In the third quarter, revenue was RMB 841 billion, up 23%. Profit from operations was RMB 55.8 billion, up 53.8%. Net profit attributable to owners of the company was RMB 37.9 billion, up 71.5%. Basic EPS RMB 0.21, up RMB 0.09 year-on-year.

The following is the operating performance of each business. For the oil, gas and new energy business, the company rigorously strengthened exploration and development, actively expanded production capacity, and strived to increase reserves and production. We continued to optimize the layout and asset structure of overseas oil and gas exploration and firmly promoted the new energy business. We attached equal importance to production and profitability and continuously enhanced cost control. In the first 3 quarters, crude oil output reached 677 million barrels with domestic output 177 million barrels, up 2.7%. The marketable natural gas output was 3.4 Tcf with domestic output of 3.3 Tcf, up 5.1%.

Oil and gas equivalent output was 1.25 billion barrels with domestic output of 1.13 billion barrels, up 3.9%. Oil and gas lifting cost was $11.7 per barrel, up 3.3%, mainly due to the increase in operating costs such as fuel and power costs.

In the first 3 quarters, the sector achieved our prelim profit of RMB 139 billion, significantly up 138% or RMB 80.6 billion. In the third quarter, crude oil output reached 225 million barrels with domestic output of 139 million barrels, up 1.3%. Marketable natural gas output reached 1.1 Tcf with domestic output of 1 Tcf, up 6.7%. Oil and gas equivalent output reached 406 million barrels with domestic output of 363 million barrels, up 3.8%. In the third quarter, the sector recorded an operating profit of RMB 56.5 billion, significantly up 105.4% year-on-year.

For the refining chemicals and new materials business, the company adhered to market-oriented approach, enhanced coordination between production and sales and actively controlled and reduced crude oil processing volume. We focus on lowering refined products and increasing chemicals output with the product structure further optimized. We also enhanced R&D efforts and establish new matured research institute in Japan, and the output of new materials was simply increased.

In the first 3 quarters, processing volume was 896 million barrels, down 1.8%. Production of refined oil products was 7.5 million barrels down 4.8%, of which gasoline down 12.4%, kerosene down 32.9% and diesel up 10.9%.

Production of chemical products was 23.5 million tons, up 3.5%. Production of ethylene was 5.5 million tons, up 15.6%. In the first 3 quarters, the sector recorded an operating profit of RMB 26.4 billion, down 17.6% or RMB 5.6 billion. Operating profit of refining was RMB 26.6 billion, up 32.1% or RMB 6.5 billion. And due to higher raw material costs, operating loss of chemicals was RMB 221 million.

In the third quarter, processing volume was 298 million barrels, down 2.5%. Production of refined oil products was 26 million tons down 1.8% of which gasoline down 11.5%, kerosene down 15.3% and diesel up 11.9%. Production of chemical products was 7.5 million tons, down 5.4% and production of ethylene was 1.7 million tons, up 1.3%.

In the third quarter, the whole sector recorded an operating profit of RMB 2.3 billion, down 76.5%. The operating profit of refining was RMB 2.6 billion, down 60.9% and the operating loss of Chemicals was RMB 309 million due to the raw materials cost increase.

As for the marketing business, the company strive to overcome the adverse impact from resurgence of the pandemic and lower market demand for refined oil products. We strive to expand sales volume and further optimize inventory management. We coordinated the development of international and domestic markets, further enhanced the profitability of international trade, actively developed integrated stations of oil, gas, hydrogen, electricity and non-oil business and strive to create new profit growth drivers.

In the first 3 quarters, the company sold 110 million tons of refined oil products down 10.5%. Domestic sales of refined oil products was 79.4 million tons down 5.6% and the sales of diesel up 9.8%, gasoline down 13.5% and the kerosene down 38.9%.

In the first 3 quarters, the sector recorded an operating profit of RMB 7.2 billion, down 17.5%. In the third quarter, the company sold 39.3 million tons of refined oil products down 9.3%. Domestic sales volume of refined oil products was 29.1 million tons, down 4.8%, of which the sales of diesel up 9.1%, gasoline down 16.3% and kerosene down 23.4%. In the third quarter, the whole sector recorded an operating loss of RMB 1.28 billion.

As for natural gas marketing business, the company actively addressed the impact of rising imported gas costs, optimized its resource structure, strictly control the procurement costs, attached great importance to preset marketing and the scale of online sales, actively expanded the retail end user market and vigorously enhanced profitability. In the first 3 quarters, the company sold 189.5 bcm of natural gas, down 4.7%, of which domestic sales of natural gas was 147.2 bcm, up 6.6% year-on-year. In the first 3 quarters, due to the rising procurement cost of imported gas, the natural gas marketing business recorded an operating profit of RMB 15.6 billion, down 15% year-on-year if excluded the impact of pipeline restructuring from Kunlun Energy last year.

In the third quarter, the company sold 59 bcm of natural gas, down 8.5%. Domestic sales of natural gas was 3.5 bcm, up 3.9%. In the third quarter, the whole sector recorded operating profit of RMB 2 billion, up RMB 2.2 billion.

The above are the company's overall operating targets for 2022 and the progress made in the first 3 quarters for your reference.

That's the third quarter report. Thank you.

[Chong Brian Xing, executive]

[Interpreted] Thank you, Mr. Liang. Now we will move on to the Q&A session. The Q&A session will have Chinese and English consecutive interpreting. [Operator Instructions] Now the floor is open for questions, please.

[Operator]

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

[Nai Di Zhao, analyst]

[Foreign Language] [Interpreted] I would like to thank the management for giving me a chance to ask, and I have 2 questions. First, entering 2022, there is the RMB depreciation as well as the Ukrainian crisis. all these add to the already complex international energy landscape and a lot of oil companies are feeling the impact already. I wonder that how will these factors affect the operation and management of PetroChina, and what is your measures to respond. And my second question is regarding the performance of the company that we pay close attention to. We see -- in terms of the Q3 net profit attributable to parent, there is a large increase year-on-year and a slight decline quarter-on-quarter. I wonder the reason behind that, and what is your outlook regarding the full year profitability here.

[Unknown Executive]

[Interpreted] Thank you, Mr. Zhao. Mr. [indiscernible] from our production and operation management department is taking the question. This year, we have seen a lot of unexpected changes in macro environment at home and overseas. The international landscape has become more complex and severe with very high and volatile international oil prices. The global natural gas supply and demand landscape is in profound adjustment, and spot LNG prices remain high. The American Federal Reserve has increased rates by a total of 300 basis points by now. And U.S. dollar index has exceeded 114 at some point which is a new high in the past 20 years. And it has caused fluctuations in the international finance department. The interest hike of U.S. dollar and depreciation of RMB has hiked the financing cost in foreign currency of the company.

Such a change has also added to our import on gas costs and losses in exchange. However, our revenue and profitability in terms of operations that held in U.S. dollars has also increased. Faced with difficulties and challenges, PetroChina has strengthened our analysis of market volatilities and made our precautions and measures in advance to guarantee the stable supply of domestic on a gas resources. First, in terms of improving the quality of our resources and our capabilities to guarantee supply, first, we speed up the production and reserve ramp-up domestically, we carried out efficient explorations enhanced the production stabilization in mature oil fields and speed up the cost effective capacity building in new ones. In this way, we can work on the capacity building in terms of domestic oil and gas production and achieve steady with increased oil output and rapid growth of natural gas.

Second, we strengthened the operation and development of overseas oil and gas resources to improve our return on investment. Third, we optimized the resource pool of import gas, enhanced communication with overseas suppliers to guarantee the stable supply of imported pipeline natural gas. Fourth, we continue to work on the capacity building in gas storage and peak shaving. Our gas storage facilities have been injected to the maximum capacity and preparing for supply guarantee in winter season.

In terms of R&C restructuring and improvement as well as working on marketing quality, first, we stay market oriented and enhanced the coordination between production and marketing to improve the resource allocation of our crude resources. We made appropriate arrangement of run rate to drive down the inventory of crude and refined oil products.

Second, we further optimized our product mix when full steam to cut fields and increased chemicals and specialty products to expedite the transformation and upgrading of our R&C arm. Third, we closely followed the demand of our customers and market dynamics to optimize the production and marketing rhythm of refining and chemical products to balance between market development and improvement in volume and profitability.

Fourth, we made active efforts to optimize the resource structure of natural gas and contain procurement cost. We focus on precision marketing, expanded online sales to add end-user retail market and improve profitability in this regard.

In terms of fending off various types of risks, we closely follow international events and dynamics in oil and gas market, exchange rate and interest rate, we prudently utilized financial derivatives to reduce risk exposure in terms of exchange rate and prices to contain all types of operational risks.

[Chong Brian Xing, executive]

[Interpreted] And the second question, Mr. Hua Wang, our CFO and Board Secretary is taking this question.

[Hua Wang, executive]

[Interpreted] In Q3, PetroChina seized the opportunities of recovery in macro economy and rebound in oil and gas demand as well as the rather high level of international oil prices deepens our campaign to improve quality and efficiency worked very hard to contain the cost and expenditure and achieved very smooth operation of our oil and gas industry chains, which means that our value creation capabilities is also growing. We have seen a net profit attributable to parent totaling RMB 37.88 billion up by 71.5% year-on-year, which means that in first half, we have achieved a historical best interim results, and the first 3 quarters also see historical best in terms of performance.

As for quarter-on-quarter, there has been a decline of 12.6%, mainly due to the prices of oil and gas products. We can see that in July, August and September, international oil prices recorded decline in 3 consecutive months. And as for the realized oil prices of PetroChina, there has been a rather large decline Q3 on Q2.

As for refined oil products, in the 3 months of the third quarter, according to the national pricing policies, there has been 5 declines and 1 increase which totaled about RMB 1,100 per ton decline for both gasoline and diesel. Besides the sales prices, there has also been rising cost of fuel, power and materials. All these factors contributed to the decline of quarter-on-quarter performance.

As for Q4, we expect that the Chinese economy will back on the track of steady and sound growth. Actually, according to the National Bureau of Statistics, in Q3, it is already showing the trend. The January to September, GDP growth was 3%. That is already 0.5 percentage point better than the H1 statistics.

In Q4, we expect that refined oil products and natural gas will both see very sound prices year-on-year.The company will continue to improve our oil and gas industry chain operations and deepen the campaign of quality and efficiency improvement, enhance our cost control on various fronts to achieve our annual targets and create greater value for our shareholders. Thank you.

[Operator]

The next question is from Horace Tse from Credit Suisse.

[Horace Tse, analyst]

[Foreign Language] [Interpreted] And the questions regarding Q3 import gas and profitability as well as the tax refund can the management share some light on these figures and also about the heating season pricing mechanism of the natural gas?

[Chong Brian Xing, executive]

Mr. Wang Hua is taking both questions.

[Hua Wang, executive]

[Interpreted] In Q3, the total natural gas imports 20.94 bcm with a loss of RMB 8.92 billion and tax refund RMB 3.52 billion. Since the pipeline natural gas imports is indexed to international oil prices, 9 to 12 months back, with the increase of international oil prices, there is a hike in the import natural gas cost. However, the city gate prices according to the government policy remain unchanged. Therefore, that is contributing to the loss-making in import natural gas business.

As for the full year outlook, we believe that in Q4, the natural gas consumption is going to increase. However, the international gas prices, especially the sports LNG, they are both seeing a lot of volatilities. We will work on both the resource and the market and to cap the losses in import natural gas business and to improve the profitability in this industry chain. On the resource end, of course, we'll continue to boost reserve and production of natural gas domestically. Just now, our presentation has shown that in the first 3 quarters, the natural gas production within China increased by 5.1%. And second, we will procure natural gas resources from diverse channels to reduce the cost. We're also going to use some hedging tools to mitigate the risk of rising costs and contain such losses.

And as for the marketing end, there are also mainly 2 fronts to work on. First, we will favor high-end and lucrative markets with more resource. And second, we can employ measures like online auctions to discover the real prices of natural gas and to improve value in this way. Overall speaking, we will work on many fronts, both on the resource and the marketing end to strike a balance between guaranteed supply and guaranteed profitability.

As for your second question regarding the realized gas prices, PetroChina has always adhered strictly to the natural gas pricing policy of the government. This winter PetroChina will further enhance our analysis of market supply and demand landscape to make appropriate natural gas marketing strategy accordingly, besides guaranteeing stable supply, we'll also work on the efficiency and profitability.

[Operator]

[Interpreted] The next question is Toby Shek from Citibank.

[Toby Shek, analyst]

[Foreign Language] [Interpreted] I have 2 questions. First is regarding the R&C sector. In Q3, we see a notable decline in terms of performance in this sector. I wonder what is your outlook about Q4. And my second question is regarding export quota. A while ago, we see that there has been news about the government releasing some export quota. However, there is also saying that in November, some of the diesel export quota will be canceled due to the tight supply of diesel in domestic market? Can the management confirm these speculations?

[Chong Brian Xing, executive]

[Interpreted] Mr. [indiscernible] from our finance department is taking your first question and Mr. Sun from our production operation management department is taking your second.

[Unknown Executive]

[Interpreted] The refining sector has seen a quarter-on-quarter profitability decline of RMB 10 billion and mainly due to the following reasons. And just as Mr. Wang Hua mentioned, the crude prices in the 3 months of Q3 has seen 3 consecutive declines down by $6 per barrel. And that caused the narrowing gross margin of gasoline and diesel. And second, there is the COVID situation domestically and a lower consumption in the domestic market, and that has caused a lower production of our gasoline.

As for our chemical operations, in Q3, there has been loss-making and mainly due to the price changes of feedstock. And also in the market, there is lower prices of the products that contribute to the narrowing of gross margin. And in the marketing operations, there have been similar factors due to the COVID-19 resurgence we see a weak demand in the refined oil market and gasoline and diesel prices down by RMB 1,095 per ton and RMB 1,055 per ton, respectively. That is because of lower gross margin and lower profitability. Faced with such a market realities, the company improved operations, restructured its business and capped the cost of production to ensure the smooth operation of oil and gas industry chain.

In Q4, we expect that the state government will deliver stronger stimulus package in terms of economic policies and domestic demand will recover. Therefore, we estimate that in Q4, the refining and chemical sector will see better performance and profit.

As for our marketing operations, we will seize the opportunities of recovery in market consumption. And state policies to straighten out the refined oil product market, and we believe that we will turn the profit in the fourth quarter. Thank you.

[Chong Brian Xing, executive]

[Interpreted] And Mr. Sun is taking your second question.

[Unknown Executive]

[Interpreted] A while ago, the policy has -- the state policy has added export quota of 15 million tons. For PetroChina, there is an increase of export quotas totaling 4.95 million tons. Export of refined oil products were meant to adjust the supply and demand landscape within China. This year, due to COVID-19 resurgence, the sales of gasoline and aviation kerosene were weaker than expected. Therefore, we arranged slightly higher export of gasoline and aviation kerosene.

As for diesel, it's supposed to first satisfy domestic demand and diesel prices have been fully hyped as well as the policies shall allow. Due to the economic recovery in China, there is a rather sound booming demand for diesel in China, but we can fully satisfy the demand with our supply. Actually, compared to the beginning of the year, our diesel inventory is actually higher right now.

As for the next step, if diesel demand continues to increase, we will have measures to respond and adapt to the new situation. For now, our run rate hasn't fully reached the original capacity, and we do have the potential to increase our processing volume and add production in this regard. We can also adjust our product mix. We can also adjust the product mix in terms of chemicals of fuels. A while ago, there was this booming demand of chemicals. So we cut fuels and increased the production of chemical products. If there is a booming demand for diesel in turn, we can reduce the production of chemicals and add that of diesel.

In terms of gasoline diesel ratio, we can also choose to reduce the yield of gasoline and increase diesel in turn. As for guaranteed supply, we can fully suffice the supply to our existing market share and you can rest assured.

Now in the interest of time, we can have the last questioner, please.

[Operator]

[Interpreted] The last questioner is Hu Xin from Haitong Securities.

[Xin Hu, analyst]

[Foreign Language] [Interpreted] I have 2 questions. First, given the changes in the oil and gas market with high oil prices, energy transition and COVID-19 resurgence. However, PetroChina adjust its various operations, for example, its CapEx and how do you plan to allocate CapEx between oil and gas business and new energy investment? And my second question is about your green and low carbon transition and some of your latest progress in terms of new energy business.

[Chong Brian Xing, executive]

Thank you for your questions. Now Ms. [indiscernible] from our planning department is taking both your questions.

[Unknown Executive]

[Interpreted] Thank you for the question. We have already made adjustments to our investment plan. And now our plan is higher than the beginning of the year. And the CapEx plan is also higher than previous years. First, in terms of E&P, we have allocated more investment into the exploration of resources and mainly in terms of seismic and pre-exploration. These efforts will be higher than previous year. It will help to consolidate resource base, and they are also seeing very good results. And second, we are also working on capacity building. And in terms of production, we believe that oil and gas will both be higher than planned earlier this year. And in the second half of the year, we are also making preparations for production ramp-up and capacity building projects of next year.

As for refining and chemical sector, we are still working on the transformation and upgrading campaign. We have already launched the Guangdong petrochemical complex and [indiscernible] ethylene project. We are also planning for the Guangxi ethylene project as well as and 2 other ethylene projects. As for the allocation of investments, Oil and gas and new energy will account for about 75%; Refining and Chemicals, 15%; and the marketing of oil and gas about 7% to 8%.

In terms of exploration, we have put more focus on natural gas. In terms of development, it's about 50 to 50 between oil and gas. The proportion of natural gas has increased by 10% to 15% compared to previous year. As for your second question regarding going on low carbon transition, the company has accelerated its pace on this regard. We have put in tremendous efforts to secure wind and solar resources, and we are seeing very good results. As for the specific implementation and delivery of these projects, the company is taking a very prudent manner.

For wind and solar, we are still at the stage of clean alternatives, and we are focusing on -- we are focusing on projects in Western and Eastern China, where the grid connection has enough capacity to accommodate these new energy power.

Our first at-scale photovoltaic project in Jilin has recorded a total of RMB 30 million in terms of profits from Q1 to Q3 this year. PetroChina is also working on geothermal resource development in Bohai Bay area. And we have been working on the CCUS full industry chain demonstration bases in Northwestern China and Northeastern China. Our target is to carry out carbon dioxide sequestration of over 1 million tons this year. For now, the demonstration bases mainly focus on the reserve of technologies, and its further implementation and expansion will be based on the carbon taxing policies of the government.

For hydrogen energy, PetroChina mainly eyes the technical reserves. In the next few years, PetroChina will further increase investment into green and low carbon undertaking to expedite our transition. Thank you.

[Chong Brian Xing, executive]

[Interpreted] And I believe that concludes our earnings call today. If you have further questions, you are more than welcome to post to our investor inbox and I look forward to meeting you again. Thank you.