It’s boom times again in the oil industry but PetroChina , PTR -1.04% Asia’s largest energy company, still seems to have the summer blues. Maybe that’s because investors are looking ahead to the winter with trepidation.
The company posted what would usually be considered stellar half-year earnings late Thursday, with net income up 114% from a year earlier to 27 billion yuan ($4 billion), the highest level since 2014. Still, its shares sold off nearly 4% in Hong Kong on Friday.
One explanation could be that what PetroChina—the listed part of China’s largest state-owned oil and natural-gas producer—is doing well, its two big state-owned rivals are doing even better. Sinopec, China’s refining heavyweight, posted its best ever half-year results earlier this month. And both Sinopec and China National Offshore Oil Corp. raised dividends by a higher percentage than their larger rival.
PetroChina has other, more structural problems.
China’s demand for clean-burning natural gas, particularly during the smoggy winter, is rising quickly—thanks to quality-of-life concerns raised by President Xi Jinping at the previous Communist Party congress. That would be great news for PetroChina and its unlisted parent China National Petroleum Corp., which together dominate the gas business in China—not so much for the country’s pesky price controls.
For PetroChina, these controls mean that when demand surges, it often ends up making deeper losses on pricey imported gas. The problem is compounded by the fact that PetroChina’s domestic gas production is growing much slower than the country’s demand: Its marketable output was up 2.5% on the year in the first half, while gas consumption rose 15% last year. In turn, PetroChina’s first-half losses on imported gas rose 13% to 13.4 billion yuan, while its natural-gas gross profit margin contracted nearly a percentage point to just 10%, against nearly 20% in its upstream oil division.
A new pricing policy harmonizing pipeline offtake rates for residential and industrial use announced in May will help mitigate, but probably not eliminate those losses. PetroChina’s crude output also remains a concern: it was up just 0.4% on the year, and excluding overseas output it would have fallen 1.3%.
The company’s weak gas-production guidance may be partly a negotiating ploy to get regulators to raise sales prices even higher ahead of the winter heating season, notes analyst Laban Yu at Jefferies. If that happens, it would help at the margin. But it won’t change the fact that PetroChina—and its shareholders—remain hostage to China’s increasingly muscular regulatory state.
Write to Nathaniel Taplin at [email protected]