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Petrochina (857 HK)-OW: Shared Acquisition of Petrobras' Peru

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Petrochina (857 HK)-OW: Shared Acquisition of Petrobras' Peru Company report Nat Resources & Energy Oil & Gas abc Equity – China Global Research PetroChina (857 HK) Overweight OW: Shared acquisition of Petrobras’ Peru assets; Target minimally accretive price (HKD) 11.40 Share price (HKD) 8.71 CNODC, the PetroChina/CNPC 50/50 JV, acquired three Peru Potential return (%) 30.9 blocks from Petrobras for USD2.6bn Note: Potential return equals the percentage difference between the current share price and the target price Production is minimally accretive at <1% via 100% interest in Dec 2012 a 2013 e 2014 e two blocks and 46.16% interest in a third block HSBC EPS 0.63 0.73 0.72 HSBC PE 10.9 9.4 9.5 Maintain OW with TP of HKD11.40 Performance 1M 3M 12M Absolute (%) -2.2 -5.3 -15.8 Relative^ (%) -3.9 -11.6 -17.3 Event: Two indirect subsidiaries of PetroChina acquired Petrobras Energia Peru from its Note: (V) = volatile (please see disclosure appendix) parent Petrobras, via purchase of 145mn shares for USD2.6bn. The purchasers, CNPC Holdings and CNODC International, are overseas subsidiaries of CNPC Exploration and Development (CNPC E&D), a 50/50 JV by PetroChina and parent CNPC. The transaction price is c.4x book and c.4.3x sales of the acquired corporate entity. The opportunity is for 14 November 2013 Enhanced Oil Recovery, deep and difficult exploration drilling through hard rock below 3,000m, and a large prospective gas resource. The deal looks good on an NPV work down Thomas Hilboldt*, CFA Head of Oil, Gas & Petrochemical of the two producing blocks but will require substantial investment to extract full value, Research, Asia-Pacific raising the risks. The Hongkong and Shanghai Banking Corporation Limited Another Latin American notch: Following the commitment for 10% of Brazil’s Libra +852 2822 2922 [email protected] development consortium, this deal shows CNPC/PetroChina’s intent to expand its upstream portfolio in Latin America and beyond. Total 2P+Contingent reserves of the Tingting Si* Analyst three blocks are 12.5bn boe, with an acquisition cost of USD0.21/boe. PetroChina said it The Hongkong and Shanghai Banking knows these assets well as it and CNPC have operated in nearby fields. Corporation Limited +852 2996 6590 Details: CNPC E&D acquires: a) full interest in Block X and Block 58 and b) 46.16% [email protected] interest in Kinteroni (Block 57). Block X (producing) has remaining 2P reserve of 125mmbbl of oil and 94bcf of gas. Block 58 (under development) has contingent reserve View HSBC Global Research at: http://www.research.hsbc.com of 2tcm of gas and 114mmbbl of condensate. Block 57, operated by Repsol, started *Employed by a non-US affiliate of production in mid-2013 and has 2P reserve of 107mmbbl of liquids and 1,996bcf of gas. HSBC Securities (USA) Inc, and is not Total output is 0.8mmtoe, or c.0.4% PetroChina’s 2012 production. registered/qualified pursuant to FINRA regulations Valuation and risks: Our TP of HKD11.4 is derived using a 15% discount to our DCF- Issuer of report: The Hongkong and Shanghai Banking based NAV per share of HKD13.4, with a cross-check to historical PE ratio ranges. Our Corporation Limited target price implies 12.4x 2014e EPS, within the range of the historical average trailing Disclaimer & PE of approximately 11.8x in 2003-13 and 12.4x over 2009-13. Downside risks include Disclosures on-going corporate governance issues, lower-than-expected oil prices, regulatory reverse This report must be read course on pricing reform and unfavourable injection of international acquisitions. with the disclosures and the analyst certifications in Index^ HSCEI Enterprise value (USDm) 280,751 the Disclosure appendix, Index level 10,637 Free float (%) 11 RIC 0857.HK Market cap (USDm) 230,159 and with the Disclaimer, Bloomberg 857 HK Market cap (HKDm) 1,784,397 which forms part of it Source: HSBC Source: HSBC PetroChina (857 HK) Oil & Gas abc 14 November 2013 Financials & valuation Financial statements Key forecast drivers Year to 12/2012a 12/2013e 12/2014e 12/2015e Year to 12/2012a 12/2013e 12/2014e 12/2015e Profit & loss summary (CNYm) Brent Crude ($/bbl) 112 101 90 91 Realized Oil Price ($/bbl) 104 93 86 87 Revenue 2,195,296 2,520,935 2,570,471 2,820,796 Gas Price ($/Mcf) 5.0 5.4 5.9 6.4 EBITDA 317,145 379,642 393,411 424,355 Total Production (mmboe) 1,343 1,387 1,437 1,491 Depreciation & amortisation -142,626 -180,631 -193,625 -205,605 Lifting costs ($/bbl) 11.7 13.0 13.1 13.4 Operating profit/EBIT 174,519 199,011 199,786 218,750 Gross Marketing Margin ($/bbl) 12.3 12.5 12.6 12.6 Net interest -16,101 -19,473 -19,440 -21,973 PBT 166,811 189,692 190,339 207,780 HSBC PBT 166,811 189,692 190,339 207,780 Taxation -36,191 -40,784 -40,923 -44,673 Valuation data Net profit 115,326 132,849 132,554 145,402 Year to 12/2012a 12/2013e 12/2014e 12/2015e HSBC net profit 115,326 132,849 132,554 145,402 Cash flow summary (CNYm) EV/sales 0.8 0.7 0.7 0.6 EV/EBITDA 5.4 4.5 4.4 4.2 Cash flow from operations 239,288 352,170 361,341 388,945 EV/IC 1.1 1.0 1.0 0.9 Capex -352,516 -355,000 -355,000 -355,000 PE* 10.9 9.4 9.5 8.6 Cash flow from investment -332,226 -295,077 -355,016 -355,283 P/Book value 1.2 1.1 1.0 1.0 Dividends -51,897 -59,782 -59,649 -65,431 FCF yield (%) -3.2 -2.9 -1.7 -0.2 Change in net debt 144,425 -11,025 53,324 31,769 Dividend yield (%) 4.1 4.8 4.8 5.2 FCF equity -41,858 -38,383 -22,240 -2,847 Note: * = Based on HSBC EPS (fully diluted) Balance sheet summary (CNYm) Intangible fixed assets 41,521 44,664 48,257 51,534 Price relative Tangible fixed assets 1,631,201 1,751,705 1,887,902 2,017,862 16 16 Current assets 414,332 440,049 442,135 478,968 15 15 Cash & others 43,395 59,080 59,080 59,080 14 14 Total assets 2,168,896 2,327,079 2,479,150 2,660,165 13 13 Operating liabilities 520,841 540,921 549,776 599,132 12 12 Gross debt 445,021 449,682 503,006 534,775 11 11 Net debt 401,626 390,601 443,925 475,695 10 10 Shareholders funds 1,064,010 1,150,791 1,223,696 1,303,667 9 9 Invested capital 1,522,818 1,636,417 1,769,438 1,890,151 8 8 7 7 2011 2012 2013 2014 Ratio, growth and per share analysis PetroChina Rel to HSCEI Year to 12/2012a 12/2013e 12/2014e 12/2015e Source: HSBC Y-o-y % change Note: price at close of 12 Nov 2013 Revenue 9.6 14.8 2.0 9.7 EBITDA -1.1 19.7 3.6 7.9 Operating profit -4.4 14.0 0.4 9.5 PBT -9.4 13.7 0.3 9.2 HSBC EPS -13.3 15.2 -0.2 9.7 Ratios (%) Revenue/IC (x) 1.6 1.6 1.5 1.5 ROIC 9.7 9.9 9.2 9.4 ROE 11.2 12.0 11.2 11.5 ROA 7.1 7.4 6.9 7.1 EBITDA margin 14.4 15.1 15.3 15.0 Operating profit margin 7.9 7.9 7.8 7.8 EBITDA/net interest (x) 19.7 19.5 20.2 19.3 Net debt/equity 34.0 29.7 31.6 31.7 Net debt/EBITDA (x) 1.3 1.0 1.1 1.1 CF from operations/net debt 59.6 90.2 81.4 81.8 Per share data (CNY) EPS reported (fully diluted) 0.63 0.73 0.72 0.79 HSBC EPS (fully diluted) 0.63 0.73 0.72 0.79 DPS 0.28 0.33 0.33 0.36 Book value 5.81 6.29 6.69 7.12 2 PetroChina (857 HK) Oil & Gas abc 14 November 2013 Acquisition vehicles remaining reserves are small, at 125mmbbl of gas and 94bcf of gas. Production in 2012 totalled CNPC E&D –the buyer 14.2kb/d of oil and 10.6mmcfd of gas. CNPC E&D is a 50/50 JV subsidiary formed in 2005 and is held by: Block 58- 100% Block 58 is an exploration-stage asset located in PetroChina, and the Department of Cuzco, near Camisea. The China National Oil and Gas Exploration and block has contingent resource of 2tcm gas and Development Corporation (CNODC), the 113.7mmbbl of condensate. Petrobras has 100% overseas E&P investment vehicle of CNPC. interest in the block. CNPC E&D has operations in Kazakhstan, Kinteroni (Block 57) – 46.16%, NPV Venezuela, Indonesia, Peru, Algeria, Azerbaijan, USD1.4bn Chad, Canada, the PRC, Ecuador, Niger and Oman. The block is a large gas/condensate field located These are the non-sanctioned country assets. in the Ucayali Basin of southeast Peru. The Petrobras Energia Peru – the seller partners are Repsol (53.85% stake) and Petrobras (46.16% stake). The target company is an indirect wholly-owned subsidiary of Petrobras, Brazil’s national Production commenced mid-2013.
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