Earnings Call: Q1 2021

Apr 30, 2021

It gives me great pleasure to meet you via the teleconference again. On behalf of the Board of PetroChina Management team, I'd like to extend heartfelt gratitude to all shareholders and analysts for your long standing trust and support. PetroChina issued its Q1 results of 2021 yesterday. In Q1, PetroChina wrote on the robust development of Chinese economy, fully leveraged our integrated advantage in oil and gas in the industrial chain. We work flat out to improve our quality and efficiency and secure excellent operation results and financial results. Our revenue RMB551.92 billion, up 8.4% year on year. The net profit attributable to the current RMB27.72 billion, our best performance in the last 7 years. This is because of the robust developments of Chinese economy and the integrated advantage of the company in oil and gas industrial chain. And this is also the results of the company in Johnson is confident for development, work harder to optimize our management and with our concerted efforts from the whole company. At present, international energy supply and demand system has undergone fast adjustments. Green and low carbon transition has become a new consensus. The new energy development has entered into an active stage. The digitalization and smart technologies is reshaping our industry. PetroChina will seize the opportunity of energy low carbon transition will actively deploy business models for clean production and grid and low carbon. Guided by the overall planning of 3 style approach of clean alternatives, strategic replacement and a grid transition, PetroChina strives to achieve carbon peak around 2025 and near zero emission around 2,050, make our contribution to China's target of carbon peak and carbon neutrality and contribute to the global climate ambition. As global economy and international oil prices continue to recover. We estimate that in the first half of twenty twenty one, our performance will maintain a stable growth. For firmly grasped the strategic opportunity of global economic transition, speed up to build a new development advantage in grid development and push forward our 5 strategies, including innovation, resources, market, internationalization, Grey and Low Carbon. We'll work even harder to deliver excellent performance to bring better larger value to shareholders and to take practical actions to reward shareholders and give back to the society. Thank you all. Good morning, ladies and gentlemen. I'd like to give you a brief introduction of PetroChina's 2021 Q1 results. In the Q1 of 2021, as COVID-nineteen pandemic was put under effective control, the world economy showed a good momentum global recovery Chinese economy is steadily picking up. China CTV growth was 18.3% year on year. Boosted by factors such as economic recovery and continued OPEC production cost compliance, international oil prices continue to recover and the average price rallied. The domestic refined oil products consumption saw substantial year over year increase and recovered to pre pandemic level. The domestic natural gas demand also registered large increase. In the Q1 of 2021, while graphing the favorable opportunities of macroeconomic recovery, demand rebounds and price increase in oil and gas markets, the company further improved quality and efficiency, continued to optimize production and Operation vigorously strengthened marketing, move faster to promote green and low carbon transition and strictly control costs and expenses. The operating profit increased significantly year on year and the financial status remains sound. We managed to achieve the best performance in the past 7 years. According to IFRS, in the Q1 of 2021, PetroChina recorded revenue of RMB551 point RMB923 billion, up 8.4 percent year on year. Operating profit RMB44.78 billion, up by RMB48.159 billion year on year. Net profit attributable to the parent company was RMB 27.7 billion, up by RMB 43.95 1,000,000,000. Earnings per share was 0.15%, increased by 0.24% beyond year. Exploration and Production segment start with cost effective exploration and development and strive to increase economically recoverable results and profitable production. The oil and gas output reached 4 70,000,000 BOE, up 0.8% year on year. Domestic oil and gas output reached 373,000,000 BOE, up 4.3% year on year. The company implemented the strategy of stabilizing oil and increasing gas, saw rapid growth in domestic natural gas production, which was 1.12 Tcf in the Q1, up 9.6% year on year. The overseas oil and gas output was 44,100,000 BOE, down by 21.7% year on year, mainly due to the decrease in shale production as a result of rising oil and gas prices. The company strictly controlled costs and expenses. The lifting cost was US9.98 dollars per barrel, down 1.0% year on year and 8.0 percent year on year adjusted for exchange rate. The Exploration and Production segment recorded operating profit of RMB12.882 billion, down RMB2.001 billion. In respect of refining and chemicals, the company continues priority to market, strengthens the management of production and operation, continue to optimize product structure and start to increase production and sales of high value added products. In 2021 Q1, PetroChina processed 298,000,000 barrels of crude oil, up 7.8% year on year. Production of refined fuels was 26,949,000 tons, up 6.9% year on year. Gasoline output was 13% up year on year, Carelifting up 18.7%, laser output down 1.2%, we produced 1.609 Meehan Changsu Kapolei, up 4.5% year on year. The Company persisted in strict control of costs and expenses, I endeavor to expand margins. The Refining and Chemicals segment recorded an operating profit were RMB14.675 billion, a significant increase of RMB23.377 billion, for which the refining business recorded an operating profit of RMB10.205 billion, an increase of RMB16.497 billion, mainly due to increase in sales of refined products, price supplies and inventory gains. The chemicals business recorded an operating profit of RMB4.47 billion, an increase of RMB6.88 billion year on year, mainly due to the increase in sales and prices of chemical products. The marketing segment strengthened control over marketing costs and continue to optimize inventory management. In the Q1 of 2021, a total of 36,248,000 tons of refined oil products was sold, up 2.2% year on year. Domestic sales for refined oil products were 24,195,000 tons, up 20.9% year on year, for which gasoline up 29.0 percent, kerosene up 83.7 percent, is up 3.6%. The marketing segment achieved an operating profit of RMB3.315 billion, an increase of RMB19.9 billion year on year, affected by increased sales volume of refined oil products, rising prices and inventory gains. The Natural Gas and Pipeline segment sees the favorable opportunity for rebounding market demand, enhanced market development and strive to promote sales volume and efficiency in peak season. In the Q1 of 2020, domestic natural gas sales were 54.655 Bcm, up 14.6% year on year. The company continued to optimize gas portfolio, ensure that domestically produced gas was sold out and strive to reduce the cost of imported natural gas. The natural gas and pipeline segments achieved operating profit of RMB18.519 billion increased RMB7.16 billion or 63% year on year, mainly due to the combined influence of factors such as the increase in natural gas sales, the decrease in the cost of import in natural gas and the pipeline effort restructuring in the previous year. These are updates of the Q1 results. Going forward, PetroChina while vigorously carrying out the 5 development strategies of innovation, resources, market, internationalization, Grid and Low Carbon, will emphasize on efficient exploration and cost effective development, stabilize oil output and speed up gas production and improve the overall efficiency of domestic upstream business. We'll emphasize on structural adjustments and integrated coordination and improve the overall efficiency for refining, chemicals and Marketing Businesses. We'll advertise on the share in end user market and promote the integrated development of natural gas and New Energies. We'll emphasize on risk control and structural optimization, bolster the sound development of overseas business. We'll put innovation and the top of our strategies, continue to improve independent innovation capacity, will accelerate the development of new energy and strive to promote ERT. Net op is the company's main operating data in Q1 2021 and production targets in 2021 for your reference. Ladies and gentlemen, The company will follow through on the deployment of the Board of Directors and try to build itself into a world class international energy company for outstanding efforts to deliver excellent performance and take practical actions to reward shareholders and give back to the supply. Thank you all. Now, we will have our Q and A session with consecutive interpreters To give more people a chance to ask questions, each please raise no more than 2 questions and please first inform which institution you represent. Now the floor is open for questions. Thank you. Hi. Congratulations on your strong results. This is Parsley from JPMorgan. My first question is, your gas and pipeline earnings are quite Zhuang, and just now you mentioned the improvement in imported gas profits. Can you share some of the details? For example, how much was the profit in first And roughly how much OP impact was there from the loss of the pipe China assets? If I look at PetroChina's E and P CapEx guidance, it is down by 6% year on year, even though gas production guidance is by 3% year on year, while crude oil CapEx guidance is flattish. Crude oil production guidance is flattish. Is there a difference in the CapEx intensity between your oil and gas projects? Mr. Wei Qingbo, Deputy Head of PetroChina Finance Department will be answering your first question. There are several reasons behind the profits of Natural Gas and Pipedrive Business, as mentioned in our presentation, in Q1, we have the profit was up by RMB7.16 billion. As mentioned in the presentation, in China, the sales volume saw a substantial increase, a 14.6% year on year growth and the price for natural gas sales also saw a 1% increase. Despite the impact from the restructuring of our pipeline business, in the Q1, we achieved our profits of 2 point RMB98 1,000,000,000 and also we have a 29.9 percent equity investment in Pipe China. The return is RMB1.58 billion. So in total, the profit is around RMB3 1,000,000,000. For the natural gas and pipeline business segment, we make a profit of RMB11.3 billion. That is from the pipeline business that is RMB3 1,000,000,000 and besides the factors of increased sales volume and prices, there is also a factor from the reducing of the cost of imported natural gas reduced by around 20%. As for the reasons behind the decline of import in natural gas costs, Last year, in the low oil price environment, there is around 9 month time lag between the international oil prices and the import in natural gas price. So in the Q1, the price was reflected especially in the peak season. And another reason is the appreciation of RMB from last year's 6.97 to 6.484 this year. That's the reason for the decline of imported natural gas coal. As international oil prices continue to recover and fluctuate, our benefit from this aspect might be eased. Mr. Song Shou Wen from Credit Department is answering the second question. Guided by the principle of coming first considering both the amounts and profitability and we set CapEx by the income, control the overall amounts to put profitability first ensuring CapEx devotion will cut the others and PetroChina has set a CapEx of RMB239 1,000,000,000 this year. This year's CapEx is similar to that of last year. In Q1, despite the increase of oil prices, PetroChina has remained the strategic focus and will continue to carry out prudent investments, targeted investments and profitable investments. And at present, we have no adjustment plan for our CapEx. From Q4, our projects are going very smoothly. That's all. Thank you. And the next question comes from Neil with Bernstein. Yes. Thank you very much and congratulations on the results. I think this is one of the first times I've seen downstream Recording a better operating income than upstream. So for the refining margins, my question is really how sustainable Do you think these higher margins are and to what extent was this driven by inventory gains? So if you could give us the inventory gains That you had in the refining segment and also in the fuels marketing segment. The second question is around the going back to the gas The gas division and the exceptional profits that were made there, Was there any contribution from the one off gain from the Kunwin pipeline divestment in 1Q or should we expect that in the second quarter? Thank you. Mr. Wenxinbo, Deputy Head of Finance Department is answering your first question. Regarding the profits of Refining and Chemicals Business segment, inventory gain is absolutely a factor. In general, for refining segment, the inventory gain is around RMB5.3 billion and for Chemicals Business because last year in 2020, we suffered a loss of RMB2.4 billion And this year, we make a profit of RMB4.47 billion, up by RMB6.68 billion. And for the profits in the Chemicals segment because we have saw a substantial increase in sales volume and also the gross margin. In the Q4, we have also may notice that our production of ethylene was 1,660,000 tons. Thanks to the structural optimization, our gross margin have improved. And another important factor is the sales volume of refined products, because in the last year in the Q1, especially in February March due to COVID-nineteen, the utilization ratio and sales has been impacted. But this year, we have maintained relatively high utilization ratio and sales volume. As international oil prices stabilizes, Without the inventory gain, we can manage to maintain a stable gross margin. And in normal times, our gross margin might be as high as the Q1. Mr. Wei Fang is answering your second question. Kunle Energy issued a circular on December 22, 2020 to sell its 60% equity interest in Beijing Pipeline and 75 percent equity in Dalian LNG Company and currently the transaction has been closed. According to the circular of Kunlun Energy, the net amount of the proceeds from this transaction, 50% will be used to pay back to shareholders, 40% will be used to expand the natural gas business in end user markets and around 10% will be used to pay back to pay the existing debt and for general operation. After the transaction between Kunlun Energy and Pipe China and after the proceeds was identified, PetroChina forecasted investment returns based on its shareholding in Koei Energy. At customs, the process from Koei Energy's transaction is around RMB 18,000,000,000. This means that PetroChina's Pre tax profits will be at another RMB 18,000,000,000 and add RMB 9,000,000,000 Han Yuan of Net Corporate to the parent company. This will be reflected in the 2nd quarter and the final pillar is subject to the operating team. With Morgan Stanley, I have two questions. First is regarding your natural gas business. You mentioned that this year PetroChina will increase imported natural gas volume and how much will it be increased? And This year, how much will the cost be increased? 2nd, in the Q1, the company's the income tax has been lower. Will it be sustainable for the whole year? And what's the reason behind that? Mr. Chaixo Ping, CFO is answering your question. In Q1, PetroChina imported 18.9 Bcf of natural gas, up 1.8 Bcf year on year. For the whole year, According to the plan, that is around 70 BCM, but we will also make relevant adjustments based on the market. As my colleagues just mentioned, the imported natural gas cost was relatively lower because it is linked to the international oil prices and there is a 9 month time lag. Therefore, it is fair to say the low import natural gas costs did contribute to our profit in the Q1. Going forward, as the imported natural gas price is linked to the international oil prices, so in general, it might be it might increase by around 20%. Regarding your second question about the company's income tax, In Q1, the company's tax rate is around 27%. There are several reasons. First, we have vigorously promote to improve the quality and efficiency and great progress has been made in dealing with the non performing companies under PetroChina. In the past, the reason why PetroChina's income tax rate is relatively high is because for some of our regional companies. They are loss making. So although the profitable companies leverage the tax, but the loss making companies cannot offset that. Therefore, we have a relatively high income tax rate. Thank you. In the interest of time, Last question please. My first question is regarding PetroChina's strategies or thoughts for Carbon Peak and Carbon Neutrality, what's your latest developments? The second question is that is about the newly established industry capital investment companies. What's PetroChina strategy in this regard? Another question from me is about the profits from the Chemicals business segment. PetroChina highly values grey and low carbon development, and we have incorporated the grey and low carbon into one of our 5 development strategies. At present, the company is still committed to follow our overall planning of 3 step approach that is creating alternative, strategic replacement and a great transition. We will strive to achieve carbon peak around 2025 and achieve year 0 emission around 2,050. PetroChina also have clear cost measures. 1st is to promote the for development of natural gas. By 2025, the gas production will account for 55% in our total production mix. 2nd is to promote the integrated development of natural gas and power generation. The third is to press ahead with a quick action plan to cover the carbon emissions. The 4th is that we will vigorously implement that forestry in carbon sink and CCUS and try to achieve carbon removal. Regarding your second third question about chemicals business, in Q1, we did have a relatively good performance and a relatively good gross margin. Entering the second quarter, the trend will maintain. Therefore, entering the Q2, PetroChina will continue to implement the strategy of reducing the fuels and increase the production of chemical products. And also for our some ethylene plants, they are running at around 100 utilization