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At $232bn, world's 3rd largest oil major is seen cheap

Mar 13 2018 09:09
Aibing Guo and Fox Hu, Bloomberg

Hong Kong - With its earnings outlook improving and massive pipeline assets expected to be restructured, analysts are forecasting a rally in PetroChina’ s Hong Kong shares, which are still trading at 2008 crisis levels.

Out of 22 analysts tracked by Bloomberg who follow China’s state-run global oil major, 14 recommend buying the stock and none call for selling. Consensus price target for the stock is about 27% higher than the current level, versus 15% for shares of comparable companies, according to data compiled by Bloomberg as of the close of trading Monday in Asia.

Following a nearly 18% increase in crude prices last year on global economic recovery and output cuts by major oil producing countries, analysts surveyed by Bloomberg project PetroChina’s profit will double in 2018 before rising another 25% in 2019.

Morgan Stanley said last week PetroChina would be the biggest winner from a crude rally as its earnings per share are most sensitive to price changes among all global majors.

Another potential catalyst is PetroChina’s plan to unlock the value of it’s nearly 80 000 kilometres of pipelines by spinning them off. That move has so far been largely ignored by investors, whose confidence has been undermined by a major corruption scandal in 2013 that resulted in the imprisonment of a number of board members and former chairman Jiang Jiemin.

PetroChina lost 0.6% to HK$5.40 a share at 1:08pm on Tuesday in Hong Kong. The city’s benchmark stock index fell 0.2%.

'Severely undervalued'

"Pipeline assets don’t count for a cent in PetroChina’s current stock price, but they will bring in huge added value after reforms," said Laban Yu, head of Asia oil and gas equities at Jefferies Group in Hong Kong, adding that PetroChina is "severely undervalued."

The National Development & Reform Commission, the country’s top economic planner, has said that pipelines of oil and gas companies should be separate units from other businesses, fuelling speculation that the country may want to strip pipelines from state-owned explorers, including PetroChina.

Vice President Huang Weihe also hinted at the possibility last year, saying upcoming reforms could unlock the value of the 500bn yuan ($79bn) worth of pipeline assets.

PetroChina officials contacted by Bloomberg News didn’t respond to a request for comment.

In terms of book value, PetroChina looks attractive. The Beijing-based firm’s H shares are trading at a 33% discount to book, making it the cheapest among oil and gas companies with a market capitalization above $100bn, according to data compiled by Bloomberg.

Exxon Mobil enjoys a 68% premium to book value, while Royal Dutch Shell trades at 1.34 times book.

Global ranking

PetroChina and Chevron have vied for the spot of third-largest publicly traded oil company - after Exxon and Shell - since mid-2016. As of Monday, PetroChina’s market capitalisation has averaged almost $232bn so far this year, compared with about $230bn for Chevron.

PetroChina’s valuation also lags behind those of state-owned peers Cnooc and China Petroleum & Chemical, known as Sinopec, which trade at 1.08 and 0.88 times book value, respectively.

To be sure, the optimism shines mainly on the company’s Hong Kong-traded shares. Of the 15 analyst rankings compiled by Bloomberg for it’s Shanghai-listed A shares, which trade at a premium to H shares, eight have a sell recommendation, four are hold and three are buy. (Dual listings are common among Chinese companies, which often sell stock to international investors in Hong Kong.)

As well, PetroChina’s Hong Kong-listed shares are not that cheap if using other metrics such as price-to-earnings ratio. According to data compiled by Bloomberg, PetroChina is trading at 16.7 times estimated earnings.

On Hong Kong’s benchmark Hang Seng Index, PetroChina is the third-worst performer over the last 10 years with about a 50% decline, which stands in stark contrast to the gauge’s 35% gain.

To Alex Wong, Hong Kong-based director of asset management at Ample Capital, which oversees $170m, investors are still reeling from the massive collapse in the company’s Shanghai-listed A shares in 2008 and the corruption scandal.

"People hate PetroChina because they got burned 10 years ago," Wong said. "The company’s former boss getting ousted is another reason why people shun the stock."

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commodities  |  markets  |  oil


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