China energy giant seen ready to unleash $85-billion spinoff

By Aibing Guo on 3/23/2017

HONG KONG (Bloomberg) -- As China’s biggest oil and gas producer prepares to report what may be its worst-ever earnings, investors are focused on billions of dollars that could be unlocked by a spinoff of its massive pipeline network.

PetroChina Co.’s natural gas and crude oil transportation system, stretching from the country’s remote borders with Central Asia to major coastal cities, could be worth at least $85 billion dollars, according to analysts at Sanford C. Bernstein & Co. and Jefferies Group LLC. As President Xi Jinping’s government prepares to unveil long-awaited energy industry reforms, speculation has grown that the company and its parent, China National Petroleum Corp., may spin off the pipelines into an independent company as soon as this year.

“While timing is unclear, there is a sense that management is in favor of such a spinoff,” said Neil Beveridge, Bernstein’s head of Asia-Pacific oil and gas research, who has a buy rating on the stock and estimates the assets are worth 585 billion yuan ($85 billion). PetroChina’s preferred option is an initial public offering that would leave it with a controlling stake, he said.

A Beijing-based spokesman for the company declined to comment.

PetroChina, which Goldman Sachs Group Inc. estimated this month trails only Exxon Mobil Corp. and Rosneft PJSC as the world’s biggest oil company by reserves, is suffering depressed prices and slumping domestic production from the country’s aging fields. While output is unlikely to rebound without a surge in prices, investors are hungry for a spinoff to unlock cash that may be used to fund fatter dividends.

The future of PetroChina’s pipelines has been unclear since 2015. The central government originally planned to strip the company, as well as its domestic rival China Petroleum & Chemical Corp., known as Sinopec, of the assets to create a new state-owned entity. That idea has since been scaled back, though regulators are still pushing for greater independence of the pipeline operations and easier access for all users.

Timing Unclear

The company may spin off the unit as soon as the end of this year, the Hong Kong Economic Journal reported in February, citing people it didn’t identify. Gordon Kwan, head of Asia-Pacific energy research at Nomura Holdings Inc., sees oil prices needing to rebound to $60 before any such move. Bernstein’s Beveridge sees it delayed until the pipeline segment accounts for less than half PetroChina’s revenue, which may not happen until next year.

Bernstein values the pipeline business at HK$3.60 per share, more than half PetroChina’s current stock price. The company in Hong Kong ended Thursday unchanged at HK$5.79, while the city’s benchmark Hang Seng Index ended little changed.

Monetizing pipeline assets is one of the few options PetroChina still has to raise funds and attract investors under the current low oil price environment, according to Laban Yu, head of Asian oil and gas equities at Jefferies, who sees the pipelines worth 597 billion yuan. Brent crude, the international benchmark, averaged about $45/bbl last year, down almost 16% from 2015.

Sprawling Asset

PetroChina holds a 71% market share of the country’s oil and gas pipelines, analysts at Goldman Sachs wrote in a March 7 report. Its network stretches more than 77,600 kilometers (48,200 miles), with almost two-thirds of that used for natural gas, according to its latest 20-F filing to the U.S. Securities and Exchange Commission.

The main natural gas network has been built in three parallel sections, known as the West-East Gas Pipeline. Those assets were consolidated into PetroChina Pipelines in December 2015, in which PetroChina holds 72.26%.

The company, which barely broke even in the first half of the year although it booked a 24.5 billion yuan one-time gain from selling pipelines, warned in January that it expects full-year profit to fall by as much as 80% because of the slump in international oil prices and low domestic natural gas rates. That means profit may decline to as low as 7.1 billion yuan, down for a third year to the weakest in data going back to 1996.

Sinopec, which may report earnings as early as Friday, may post an 18% rise in net income, including one-off items, to 38.3 billion yuan, according to the mean estimate of 8 analysts surveyed by Bloomberg. The company last year sold 50% of its Sichuan-to-East China pipeline for 22.8 billion yuan, though it’s unclear when it will account for that gain.

China’s biggest offshore explorer, Cnooc Ltd., may report Thursday its first annual loss since its Hong Kong trading debut in 2001. Net income is forecast to have swung to a 3.22 billion yuan loss, according to the mean estimate of 10 analysts surveyed by Bloomberg.


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