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CNPC (Hong Kong) Limited (135.HK) - Slumping oil price and production weaken the revenue

Wednesday, December 31, 2008

5424

CNPC (Hong Kong) Limited(135)

Recommendation on 31 December 2008
Recommendation	Sell
Price on Recommendation Date	$2.430
Target Price	$1.960

Weekly Special - 2333 Great Wall Motor

Summary

In the first half of 2008, CNPC (Hong Kong) Limited reported its turnover increased 64.22% to HK$2.84 billion from HK$1.73 billion over the same period last year. Profit attributable to the shareholder of the company increased 88.65% to HK$1.28 billion from HK$681 million.

The profit margin increased from 48.30% to 57.38% in the first half of 2008. The main reason was that the exploration cost and the administrative expenses were controlled well compared with the same period last year. Also, the share of results of associate and jointly controlled entities increased 88.6% and 109.9% respectively.

Notwithstanding the sales volume of crude oil decreased 4.17% or 355,000 barrels to 8.16 million barrels in the first half of 2008, with the increased average realized price of crude oil, from USD49.79/barrel to USD84.54/barrel, the company`s revenue still had a 64.22% increase.

Projects in China

Liaohe Leng Jiapu oil field sold 443,000 tonnes of crude oil in the first half of 2008. While it sold 497,000 tonnes of crude oil in the first half of 2007. It decreased 10.81% when compared with the same period last year. The oil field became mature and its oil production started to decline.

According to Leng Jiapu Contract, the company has to bear 70% of the development costs and to invest over HK$586 million in 2008.

In the first half of 2008, Xinjiang Karamay oil field sold 427,000 tonnes of crude oil, increased 18.11% over the same period last year.

According to Xinjiang Contract, the production sharing contract ended at 31 August 2008. However, the contract can be extended up to year 2021. The company has received approval from the PRC government.

Overseas projects

The company indirectly owns 15.07% equity interest of Aktobe, which owns several oil fields in Kazakhstan. For the period, the company sold 2,765,000 barrels of crude oil and 4,318 million cubic feet of natural gas, decreased 15% and increased 70% respectively when compared with corresponding period of last year.

The Sukhothai concession in Thailand sold 173,000 barrels of crude oil, decreased 13.4% over the same period of last year. However, profit after tax increased 75.3% to HK$32.4 million.

The company was also granted by the Thailand government to have the right to undergo oil exploration in L21/43 concession next to the Sukhothai concession. The company can convert 28.8 square kilometers to development area.

The company has 50% interest in the rights to explore and produce oil and gas in Blocks VI and VII of Talara oil field in Peru. For the period, the company sold 503,000 barrels of oil and 350 million cubic feet of natural gas. The company also entered an exploration agreement with a company wholly-owned by the Peruvian government. HK$21.4 million was incurred as exploration costs and it is expected to generate return for the company in the future.

During the period, the company owns 25% interest in the Block 5 oil field in Oman. The oil field sold 795,000 barrels of crude oil, up 27% over the same period of last year. The company also has 25% interest in K&K oil field in Azerbaijan. This oil field sold 448,000 of crude oil, down 18% over the same period last year.

Project delay in Indonesia

The company has signed contract with CGB II to own 70% interest of Bengara II. However, after drilling of four exploration wells, the exploration term expired and all the testing activities were suspended. The company has written to Petroleum Department of Indonesia to extend the exploration term, but no formal reply has been directed to the company.

Dropping oil and gas reserves

As an oil and gas exploration and production company, it is important to maintain its oil and gas reserves. However, its oil and gas reserves keep dropping. We have to remain cautious to its oil and gas reserves. However, we expect there will be further asset injection from its parent company, CNPC, also the parent company of PetroChina.

Geographical segments

Peers comparison

Risk factors

High volatility in international crude oil prices

Government policies from different countries

Economic slowdown which lowers the oil and gas demand growth

Delay in any major projects

Valuation

Oil demand shrunk in 2008 for the first time since 1983 due to the global economy downturn. We estimate the demand for oil will not be as strong as before. This also applies to the international crude oil prices. The major revenue is from China, given the maturing oil fields, the production, as well as the revenue will decrease as a result. The profit for CNPC (HK) Limited is not optimistic.

Therefore, we set our estimated 2009 P/E to be 6.8x. We would rate CNPC (HK) Limited as “Sell”. The 2009 target price is HK$1.96.

Company Description

CNPC (Hong Kong) Limited is a pure exploration and production company which does not have downstream operations. Currently, the company has 11 projects in China and foreign countries, including Kazakhstan, Peru, Oman, Indonesia, and Azerbaijan. CNPC (Hong Kong) Limited is now 56.66% owned by PetroChina.

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