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Nikkei Markets

PetroChina reviewing capex, output goals on oil's plunge

Asset injection into PipeChina won't affect business continuity

PetroChina, an integrated energy company that also has a presence in refining, fuel marketing and gas distribution, produced 909.3 million barrels of oil last year.   © Reuters

HONG KONG (Nikkei Markets) -- PetroChina signaled on Thursday that it was still in a wait-and-watch mode with regards to its targeted capital expenditure and production goals for 2020 following the historic plunge in oil prices that have begun to hurt its financial performance.

Chief Financial Officer Chai Shouping said on a conference call that the Chinese energy giant is currently in the middle of compiling a capex plan that is "dynamic to the change in oil prices," and that the overarching objective is to "make ends meet" while realizing positive free cash flows.

PetroChina will strive to improve its return on capital from around the 4.7% level it saw in 2019, he said.

The state-controlled company's board had previously given the green light to a capex of 295 billion yuan ($41.5 billion) for 2020. PetroChina's capex rose 15.9% to 296.8 billion yuan 2019.

Capex at Chinese energy companies is closely observed as the country is striving for energy security, against the backdrop of the Sino-American trade war as well as volatile geopolitical conditions in some of the world's biggest energy producing regions.

Vice President Li Luguang said that PetroChina's energy production business was taking the biggest hit with international oil prices "falling off a cliff," and that the company aims to balance its production capacity and efficiency with the country's short- and long-term interests.

PetroChina, an integrated energy company that also has a presence in refining, fuel marketing and gas distribution, produced 909.3 million barrels of oil last year, an increase of 2.1% over the level in 2018, while its output of marketable natural gas increased 8.3% to 3,908 billion cubic feet.

It had prospecting and mineral rights over a total area of 288 million acres at the end of 2019.

Global crude oil prices that were already in a downtrend plummeted more than 24% on Mar. 9 as Saudi Arabia began offering steep discounts and signaled plans to boost production after failing to reach an agreement with Russia to cut output.

Demand for oil has also been affected this year by the new coronavirus pandemic, which is widely expected to drag the global economy into a recession.

Brent crude oil futures were down 1.4% at $27 a barrel on Thursday, compared with their price of more than $61 a barrel at the end of 2019.

The tumble has led analysts to slash the price targets of PetroChina and other oil producers. Those at Daiwa earlier this month cut PetroChina's earnings estimates for 2020 and 2021 by up to 45%.

PetroChina's Chai and Li were on Thursday speaking on a call after the company reported a 13.9% fall in 2019 net profit to 45.68 billion yuan ($6.44 billion). Its operating income increased 6% to 2.52 trillion yuan.

PetroChina said in its earnings statement that the decline in oil prices since the beginning of March has adversely affected its sales revenue and profits, and that the group strives to maintain "stable and healthy development of production and operations."

Meanwhile, PetroChina also said the impending transfer of certain pipeline assets by the company into China Oil & Gas Pipeline Network Corp., or PipeChina, "may leave some impact on the development of the natural gas and pipeline business, and the operating results of the group."

The asset injection, however, won't affect its business continuity or management stability, it said.

China had last year established PipeChina as a national company into which pipeline assets of various state-owned companies are expected to be merged.

The plan is intended to eventually help improve the nationwide network of pipelines and benefit private distributors that currently don't own or have access to adequate infrastructure, nor the financial muscle to build their own assets. PipeChina is eventually expected to be listed on the stock exchanges.

Daiwa analysts had in their report earlier this month estimated that PetroChina's spin-off of its pipelines could be valued at 370 billion yuan, or 1.2 times their value on the company's books.

CFO Chai on Thursday described PetroChina's pipeline business as a "pillar" of profitability in its natural gas and pipelines business division, bringing in 36.5 billion yuan in operating profits last year. He said further details on the asset injection into PipeChina would be made in due course.

Shares of PetroChina fell 2.3% in Hong Kong before the results were announced, taking their losses so far in 2020 to 34.3%. The city's benchmark Hang Seng Index slipped 0.7% on Thursday, taking year-to-date losses to 17.2%.

-- Benny Kung & Lopamudra Bhattacharya

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