China energy 110929


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China energy 110929

  1. 1. Global StrategyEquity Research Asia Sector StrategySeptember 29, 2011 China Oil & Gas: Taxing IssuesS&P 2011 GDP ESTIMATES:China: 8.8%-9.3% We stay Overweight on the China oil & gas companies: despite a potentialHong Kong: 4.3%-4.8% 2H11 weakness in oil demand, we expect long-term growth to remain steady,India: 7.5%-8.0% on increasing energy demand in line with the economy, but short-termIndonesia: 6.1%-6.6% headwinds are increasing with the possible imposition of a nationwideKorea: 4.2%-4.7% resource tax.Malaysia: 4.8%-5.3%Singapore: 4.5%-5.0% Changing picks in a changing environment : Our top pick remains CNOOC environment:Taiwan: 4.0%-4.5% Ltd (00883, HKD12.80, 5-STARS), as the 27% decline over the last threeThailand: 3.7%-4.2% months has created an attractive entry point, in our view, but we have cutU.S.: 1.6% our 12-month target price to HKD16 (from HKD18) to reflect a potentialEurozone: 1.7% resource tax and the suspension of PL19-3 production. We also raised Sinopec (00386, HKD7.55) to 4-STARS (Buy), from 3-STARS (Hold) on lower2011 INDEX TARGETS: resource tax impact due to smaller upstream presence and heavier crudeS&P 500: 1,250 quality, as well as better control over refining losses. Our call on PetroChinaS&P Euro 350: 850 (00857, HKD9.52) is cut a notch to 3-STARS (Hold), as we expect theS&P Asia 50: 3,300 company to suffer the most from the potential resource tax in 2012, given its large upstream presence.HY12 INDEX TARGETS:S&P 500 Target: 1,400 Re source tax overhang : The news of the Chinese State Council decision lastS&P Euro 350 Target: 1,000 week to reform the resources tax, (to be levied based on both the value andS&P Asia 50 Target: 3,500 the volume of the resources) is negative in our view for the Chinese energy companies. Our channel checks with Sinopec indicate that there is no immediate impact on earnings, but given that resource tax for China has been paid on a volume basis (apart from the Western provinces, for which it is based on both value and volume as of July 2010), a change in regulationsEnergy to standardize the rules indicates to us that resource tax rollout to the rest of the region will come sooner rather than later. We expect the base rate to beOverweight similar to that paid in the Xinjiang and Western provinces, which is 5%,Oil & Gas adjusted for crude qualities.Overweight Refining losses piling up in 1H11 , but slight relief expected in 3Q 11 : For 11: both PetroChina and Sinopec, refining losses widened substantially in 2Q11, due to inadequate refined product price adjustments, which lagged the crude price run-up in 1H11. We expect 3Q11 refining losses to narrow slightly, given the current weakness in energy prices, but gains may be capped if theAhmad Halim, CFA Chinese government cuts refined product prices to cap high inflation.Equity Analyst Upstream updates: The full suspension of CNOOC Ltd’s PL19-3 field should affect 2011 production by about 6 mmboe. In the absence of guidance on when the field will be back onstream, we assume production will recommence in 2H11. PetroChina booked in substantial production gains in 1H11 (+5% YoY, strongest in recent years), while Sinopec also announced recently the discovery of the Yuanba gas field, which could potentially eclipse its current biggest field Puguang. This report is for information purposes and should not be considered a solicitation to buy or sell any security.Standard & Poor’s Neither Standard & Poor’s nor any other party guarantees its accuracy or makes warranties regarding resultsEquity Research Services from its usage. Redistribution is prohibited without written permission. Copyright © 2011. All required17th Floor, Prudential Tower d i s c l o s u r e s a n d a n a l y s t ce r t i f i ca t i o n a p p e a r s o n t h e l a st 3 p a g e s o f t h i s r e p o r t . A d d i t i o n a l i n f o r m a t i o n i s30 Cecil Street, Singapore a v a i l a b l e o n re q u e s t .
  2. 2. September 29, 2011 G loba l Str ate gy Where do we see values? Based on S&P Capital IQ estimates, both CNOOC Ltd and Sinopec are looking cheap, at 6.8x and 6.3x 2012 EPS (vs. E&P peers 2 and integrated peers at 9x and 7x respectively), and underpins our preference for the stocks. Petrochina looks relatively expensive but its strong domestic footing and above average dividend yields should ensure limited downside. Stand ard & Po or’ s Equit y R es e arch
  3. 3. September 29, 2011 G loba l Str ate gy as 27 Select Integrated Oil & Gas and E&P Performance and Key Capital IQ Consensus Ratios a s of Sep. 27, 2011 3 Price Performance PER (x) PAT Growth Market Trading Cap (USD Company Name CIQ Ticker Ccy Share Price mln) 1 Mth 3 Mths 6 Mths FY2011 FY2012 FY2011 FY2012 Integrated O&G Exxon Mobil Corporation NYSE:XOM USD 72.91 354,497 0.4% -8.4% -12.7% 8.5x 8.2x 38.4% 2.9% PetroChina Co. Ltd. SEHK:857 HKD 9.52 271,143 3.8% -15.8% -14.8% 9.7x 8.6x 10.6% 11.4% Royal Dutch Shell plc LSE:RDSA GBP 20.36 203,705 4.1% -5.0% -9.0% 7.0x 6.7x 31.3% 9.0% Chevron Corporation NYSE:CVX USD 93.54 187,359 -3.4% -6.8% -11.8% 6.9x 7.0x 39.6% 3.3% BP plc LSE:BP. GBP 4.05 120,325 4.8% -8.7% -15.2% 5.4x 5.4x NM 3.4% China Petroleum & Chemical Corp. (Sinopec) SEHK:386 HKD 7.55 92,171 7.5% -3.1% -1.8% 7.0x 6.3x 10.8% 10.7% ConocoPhillips NYSE:COP USD 64.26 88,231 -1.9% -12.3% -19.2% 7.8x 7.3x 2.7% 1.5% PTT Public Co. Ltd. SET:PTT THB 283.00 26,180 -10.7% -12.7% -18.2% 7.8x 7.1x 24.0% 10.2% Average 0.58% -9.10% -12.84% 7.5x 7.1x 22.5% 6.5% Exploration & Production (E&P) CNOOC Ltd. SEHK:883 HKD 12.80 73,340 -11.1% -27.0% -31.6% 6.8x 6.8x 32.3% -0.1% Statoil ASA OB:STL NOK 123.40 68,575 -0.8% -5.8% -19.6% 7.4x 6.8x 43.3% 7.9% Suncor Energy Inc. TSX:SU CAD 28.38 43,828 -4.7% -24.4% -34.5% 9.4x 8.3x 33.8% 17.7% Anadarko Petroleum Corporation NYSE:APC USD 71.31 35,499 2.9% -4.6% -13.1% 21.0x 17.7x 122.9% 28.8% Apache Corp. NYSE:APA USD 85.86 32,964 -14.4% -28.3% -32.0% 7.1x 6.7x 56.0% 16.6% Woodside Petroleum Ltd. ASX:WPL AUD 31.40 24,373 -11.3% -20.8% -33.3% 15.5x 12.0x 3.9% 39.7% Hess Corporation NYSE:HES USD 56.87 19,329 2.1% -20.4% -31.5% 8.1x 7.4x 14.5% 17.1% PTT Exploration and Production Public Co. Ltd. SET:PTTEP THB 151.50 16,301 -7.9% -8.7% -16.5% 10.6x 8.6x 15.3% 25.4% Average -5.65% -17.51% -26.50% 10.7x 9.3x 40.2% 19.1% EV/EBITDA PBV ROE Gross Margin Div Yield Company Compa ny Name FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 Integrated O&G Exxon Mobil Corporation NYSE:XOM 3.9x 3.7x 1.9x 1.7x 25.7% 23.5% 45.80% 47.70% 2.54% 2.69% PetroChina Co. Ltd. SEHK:857 5.8x 5.3x 1.4x 1.3x 15.0% 15.2% 45.93% 46.37% 4.49% 5.02% Royal Dutch Shell plc LSE:RDSA 3.6x 3.4x 1.2x 1.0x 17.4% 16.1% 23.00% 23.60% 5.28% 5.61% Chevron Corporation NYSE:CVX 3.0x 2.9x 1.5x 1.3x 23.3% 19.8% 43.80% 46.00% 3.31% 3.47% BP plc LSE:BP. 3.1x 3.1x 1.1x 1.0x 21.0% 18.6% 20.50% 21.20% 4.37% 4.69% China Petroleum & Chemical Corp. (Sinopec) SEHK:386 4.7x 4.3x 1.1x 1.0x 17.0% 16.4% 15.37% 16.94% 3.75% 4.06% ConocoPhillips NYSE:COP 3.5x 3.4x 1.3x 1.2x 17.0% 16.9% 25.70% 26.10% 4.04% 4.35% PTT Public Co. Ltd. SET:PTT 6.1x 5.3x 1.4x 1.3x 19.4% 18.7% 8.95% 9.04% 4.44% 4.76% Average 4.2x 3.9x 1.4x 1.2x 19.5% 18.2% 28.63% 29.62% 4.03% 4.33% Exploration & Production (E&P) CNOOC Ltd. SEHK:883 3.5x 3.4x 1.8x 1.5x 28.8% 23.9% 55.41% 54.22% 5.31% 5.10% Statoil ASA OB:STL 1.8x 1.7x 1.5x 1.3x 25.5% 21.3% 49.68% 50.67% 5.32% 5.58% Suncor Energy Inc. TSX:SU 4.9x 4.4x 1.1x 1.0x 12.9% 12.4% 60.80% 62.40% 1.52% 1.61% Anadarko Petroleum Corporation NYSE:APC 5.5x 4.8x 1.6x 1.5x 7.3% 8.2% 70.35% 70.65% 0.51% 0.51% Apache Corp. NYSE:APA 3.3x 2.9x 1.2x 1.0x 17.8% 16.7% 77.55% 78.15% 0.73% 0.73% Woodside Petroleum Ltd. ASX:WPL 9.5x 6.3x 2.0x 1.8x 13.4% 17.7% 66.75% 68.60% 3.37% 4.31% Hess Corporation NYSE:HES 3.1x 2.8x 1.0x 0.9x 13.5% 12.5% 25.10% 25.30% 0.73% 0.73% PTT Exploration and Production Public Co. Ltd. SET:PTTEP 4.9x 3.9x 2.4x 2.0x 25.2% 26.0% 52.88% 53.04% 3.70% 4.60% Average 4.5x 3.8x 1.6x 1.4x 18.0% 17.3% 57.31% 57.88% 2.65% 2.90% Source: S&P Capital IQ Stand ard & Po or’ s Equit y R es e arch
  4. 4. Sept emb er 29, 2 01 1 G loba l Str ate gy EV- Enterprise ValueGlossary FCF- Free Cash Flow FFO- Funds From Operations 4 FY- Fiscal YearS&P STARS - Since January 1, 1987, Standard & Poor’s Equity Research Services P/E- Price/Earningshas ranked a universe of U.S. common stocks, ADRs (American Depositary Receipts), PEG Ratio- P/E-to-Growth Ratioand ADSs (American Depositary Shares) based on a given equity’s potential for PV- Present Valuefuture performance. Similarly, Standard & Poor’s Equity Research Services has used R&D- Research & DevelopmentSTARS® methodology to rank Asian and European equities since June 30, 2002. ROE- Return on EquityUnder proprietary STARS (STock Appreciation Ranking System), S&P equity analysts ROI- Return on Investmentrank equities according to their individual forecast of an equity’s future total return ROIC- Return on Invested Capitalpotential versus the expected total return of a relevant benchmark (e.g., a regional ROA- Return on Assetsindex (S&P Asia 50 Index, S&P Europe 350® Index or S&P 500® Index)), based on a SG&A- Selling, General & Administrative Expenses12-month time horizon. STARS was designed to meet the needs of investors looking WACC- Weighted Average Cost of Capitalto put their investment decisions in perspective. Data used to assist in determiningthe STARS ranking may be the result of the analyst’s own models as well as internal Dividends on American Depository Receipts (ADRs) and American Depositoryproprietary models resulting from dynamic data inputs. 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The range of scores in the array of are determined and assigned by S&P equity analysts, S&P’s quantitativethis sample has been aligned with the following ladder of rankings: evaluations are derived from S&P’s proprietary Fair Value quantitative model. InA+ Highest B+ Average C Lowest particular, the Fair Value Ranking methodology is a relative ranking methodology,A High B Below Average D In Reorganization whereas the STARS methodology is not. Because the Fair Value model and theA- Above Average B- Lower NR Not Ranked STARS methodology reflect different criteria, assumptions and analytical methods, quantitative evaluations may at times differ from (or even contradict) an equityS&P Issuer Credit Rating - A Standard & Poor’s Issuer Credit Rating is a current analyst’s STARS recommendations. As a quantitative model, Fair Value relies onopinion of an obligor’s overall financial capacity (its creditworthiness) to pay its history and consensus estimates and does not introduce an element of subjectivityfinancial obligations. This opinion focuses on the obligor’s capacity and willingness as can be the case with equity analysts in assigning STARS meet its financial commitments as they come due. It does not apply to any specificfinancial obligation, as it does not take into account the nature of and provisions ofthe obligation, its standing in bankruptcy or liquidation, statutory preferences, or the S&P Global STARS Distributionlegality and enforceability of the obligation. In addition, it does not take into account In North Americathe creditworthiness of the guarantors, insurers, or other forms of credit As of June 30, 2011, research analysts at Standard & Poor’s Equity Researchenhancement on the obligation. Services U.S. recommended 38.4% of issuers with buy recommendations, 54.8% with hold recommendations and 6.8% with sell recommendations. CoreS&P Core Earnings - Standard & Poors Core Earnings is a uniform methodology foradjusting operating earnings by focusing on a companys after-tax earnings In Europegenerated from its principal businesses. Included in the Standard & Poors definition As of June 30, 2011, research analysts at Standard & Poor’s Equity Researchare employee stock option grant expenses, pension costs, restructuring charges from Services Europe recommended 36.0% of issuers with buy recommendations, 48.3%ongoing operations, write-downs of depreciable or amortizable operating assets, with hold recommendations and 15.7% with sell recommendations.purchased research and development, M&A related expenses and unrealized In Asiagains/losses from hedging activities. Excluded from the definition are pension gains, As of June 30, 2011, research analysts at Standard & Poor’s Equity Researchimpairment of goodwill charges, gains or losses from asset sales, reversal of prior- Services Asia recommended 45.1% of issuers with buy recommendations, 47.7%year charges and provision from litigation or insurance settlements. with hold recommendations and 7.2% with sell recommendations.S&P 12 Month Target Price – The S&P equity analyst’s projection of the market Globallyprice a given security will command 12 months hence, based on a combination of As of June 30, 2011, research analysts at Standard & Poor’s Equity Researchintrinsic, relative, and private market valuation metrics, including S&P Fair Value. 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