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Edited Transcript of 601857.SS earnings conference call or presentation 29-Apr-20 8:45am GMT

Q1 2020 PetroChina Co Ltd Earnings Call

Bejing May 6, 2020 (Thomson StreetEvents) -- Edited Transcript of PetroChina Co Ltd earnings conference call or presentation Wednesday, April 29, 2020 at 8:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Xing Chong

PetroChina Company Limited - Deputy Director of Investor Relations

* Wei Fang

PetroChina Company Limited - Assistant Secretary of the Board

* Sun Bo

PetroChina Company Limited

* Chong Lai

PetroChina Company Limited

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Conference Call Participants

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* Andy Meng

Morgan Stanley, Research Division - Executive Director of China Energy and Chemical Research Team

* Lawrence Lau

BOCI Research Limited - Equity Analyst

* Horace Tse

Crédit Suisse AG, Research Division - Head of China Oil and Gas Research

* Lei Mu

JPMorgan Chase & Co, Research Division - Analyst

* Neil Beveridge

Sanford C. Bernstein & Co., LLC., Research Division - Senior Oil and Gas Analyst

* Qin Peijing

CITIC - Analyst

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Presentation

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Xing Chong, PetroChina Company Limited - Deputy Director of Investor Relations [1]

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Good afternoon, ladies and gentlemen. On behalf of PetroChina Company Limited, I would like to welcome you all and thank you for attending the company's 2020 first quarter results analyst conference call. I am Xing Chong, Deputy Director of Investor Relations of PetroChina.

For the call today, we have Mr. Wei Fang, Assistant Secretary to the Board. We also have Mr. Jiang Jie, Director of Investor Relations; Madame Yun Hong, Executive Director of Financial Department; and also Madame (inaudible), IR Officer of PetroChina.

First, it's my pleasure to invite Mr. Wei Fang, Assistant Secretary to the Board, for an opening remark. Mr. Wei, please.

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [2]

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Thanks, Brian, for the introduction. Hi, everyone. This is Wei Fang, Assistant Secretary to the Board of Directors. On behalf of the management and my team at PetroChina, I would like to thank you all for attending today's first quarter results conference call. I would like to also send our best regards to all the research team and PMs, for your long-term support to PetroChina and our team in Beijing and Hong Kong.

Starting from this year, we saw abrupt changes in the global oil and gas market as the COVID-19 pandemic crushed the demand. The steep decline of oil prices have increased the pressure from all oil and gas companies. As you can see from the first quarter numbers, we have suffered greatly from this unprecedented situation.

However, we took comfort to see that COVID-19 provision and controlling measures have proven to be effective in China. The government's measures to resume work and production are showing good results with signals showing acceleration of economic and social development and gradual recovery of domestic oil and gas demand. Also, we had a very good news today. I have to say it one more. We had a very good news today that the People's Congress will be held on May 22. This is a very good indication of this full resumption of normal life in Beijing and in China. So personally, I'm very thrilled to hear the good news. And hopefully, there will be more and more news, good news, from around the world in our fight against the pandemic.

With that good news, I would like to give the floor to Dr. Brian Xing to have a quick update on the first quarter results. I have to remind you all that the copy of the first quarter presentation could be downloaded from the corporate website. So the copy of the first quarter presentation could be downloaded from the corporate website under Roadshow section. Thank you. Thank you, Brian.

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Xing Chong, PetroChina Company Limited - Deputy Director of Investor Relations [3]

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Okay. Thank you, Mr. Wei. Now I will present the company's first quarter financial and operational highlights. In the first quarter of 2020, the growth of the world economy and trade was adversely affected by the COVID-19 with a great downward risk and significant increase in factors in instability and uncertainty.

The economy in China was also affected significantly. The GDP of China decreased by 6.8% as compared with the same period of last year. As a result of the decline of macro economy, supply exceeded demand in the international oil market and the international oil prices dropped significantly, of which the average prices decreased as compared with the same period of the last year.

The average spot price of Brent crude oil price was about USD 50.14 per barrel, representing a decrease of 20.6% year-on-year. The average spot price of WTI was about USD 45.52 per barrel, declined about 17% year-on-year. While the domestic refined oil consumption decreased significantly year-on-year, the issue of extracting the supply was further upgrade. The demand of domestic natural gas market also decreased as compared with the same period of last year.

In the first quarter of 2020, facing the severe and complicated global economic environment and operational situation, PetroChina has tried its best efforts to reduce the impact of the COVID-19 by taking effective measures to prevent and control COVID-19, resuming work and production in an orderly way, launching a campaign of improving quality and enhancing profitability, focusing on optimization of production and operation, and devoting major efforts to intensify the control of the investment, costs and expenses.

As according to IFRS, in the first quarter of 2020, PetroChina reported revenue of RMB 509 billion, declined about 14.4% year-on-year, mainly affected by the sharp drop in oil and gas prices and the decrease in sales. Operating loss was about RMB 3.3 billion, represents a decrease in profit of RMB 32.9 billion year-on-year. Net loss attributable to owners of the company was RMB 16.2 billion, representing a decrease in profit of RMB 26.5 billion year-on-year, mainly affected by the decline in revenue and the inventory impairment losses caused by the sharp drop in oil prices. Basic loss per share was about RMB 0.089, representing a decrease of -- by RMB 0.145 year-on-year.

In the exploration and production sector, the company insisted on highly efficient exploration and endeavor to increase recoverable reserves qualified for economies of scale. The company capital reporting its resources foundation and give priority to profitable developments.

In the first quarter, the oil and gas equivalent output reached 413.9 million barrels, up by 6.1% year-on-year. The overseas, on a GAAP equivalent output, accounts about 13.6% of the total production of the company.

In the first quarter 2020, the Exploration and Production segment recorded operating profit of RMB 14.8988 billion, up by 3.9% year-on-year. The average realized crude price was USD 54.39 per barrel, down about 8.6% year-on-year, among which the domestic realized price was about USD 56.42 per barrel, down by 5.0% year-on-year.

The average realized natural gas price was USD 5.10 per 1,000 cubic feet, down by 23.1% year-on-year, among which the domestic realized price was USD 5.80 per 1,000 cubic feet, down by 11.5% year-on-year. The oil and gas lifting costs declined by 8.9% year-on-year.

In the Refining and Chemicals segment, the company actively responded to the adverse impact of the demand decline in domestic refined oil markets and optimized production operations by rationally adjusting the processing loads of chemical production facilities and the product structure.

In the first quarter of 2020, PetroChina [processed] 276.5 million barrels of crude oil, down by 9.6% year-on-year. Production of major oil products was 25.2 million tons, down by 13.8% year-on-year. Gasoline output declined by 13%. Kerosene output declined by 22.3%. Diesel output declined by 12.7%. Production of chemical products increased by 2.9% year-on-year, in which the production of ethylene declined about 1.3%.

The Refining and Chemicals segment recorded an operating loss of RMB 8.7 billion, a decrease of RMB 11.77 billion year-on-year, of which the refining business recorded an operating loss of RMB 6.29 billion, a decrease of RMB 6.4 billion year-on-year. This is mainly due to the adverse effect of decrease in sales of refined products, dropping prices and decreasing profit from inventories.

The chemical business recorded an operating loss of RMB 2.4 billion, a decrease of about RMB 5.36 billion year-on-year, mainly due to the decrease in the sales and prices of chemical products.

In the Marketing segment, the company actively coped with adverse effect of the COVID-19 situation and the market downturn and optimized its product structure and inventory management.

In the first quarter of 2020, the sales of the refined oil products reached about 35.5 million tons, down by 15.9% year-on-year, of which the sales of gasoline declined about 16.7%, the sales of kerosene declined about 20.8%, the sales of diesel declined about 14%.

As a result of the outbreak of COVID-19, the decrease in demand for the oil refined products on domestic markets, the Marketing segment recorded an operating loss of RMB 16.59 billion, a decrease of RMB 20.11 billion year-on-year.

As for natural gas and the pipeline segment, the segment realized operating profit of RMB 11.36 billion in the first quarter of 2020, a decrease of 9.7% year-on-year. The net loss increase from sales of imported gas and LNG amounting to RMB 3.9 billion, an increase of loss of RMB 644 million year-on-year, mainly due to the early implementation of off-season price policies and reduced natural gas sales prices. The company will continue to take effective measures to control losses.

PetroChina demonstrated its commitment to corporate and social responsibilities and gave full support in the fight against COVID-19 since the outbreak. We made appropriate measures for epidemic provision and control to resume work and production in an orderly manner. We supported the regions significantly impacted by COVID-19, including making donations to Hubei Province, and allocation of oil and gas resources to secure a sufficient supply in the region.

The refined oil marketing companies opened green lanes and convenient tracks to providing round-the-clock service and resources of all varieties. The natural gas marketing companies donating natural gas to designated hospitals in Hubei Province.

Leveraging the advantage our industry's skills and talents, the refining company re-purposed their production lines to assist manufacturing of medical protective equipment while conducting research and development and put into operation of medical necessities, such as melt-blown nonwoven fabrics and surgical masks. The company is [providing necessary] support in the fight against COVID-19.

In the next 3 quarters of 2020, these factors such as the downturn of world economy, it is expected that the international crude oil market will still be oversupplied and the international oil price is expected to fluctuate at a low level. The company will highlight its key projects while constraining its non-major projects. This is on cost-cutting as well as enhancing efficiency and adhere to bottom line thinking of adjusting expenses based on income. We will adjust the annual business development and investment plan in a timely and dynamic manner according to changes in oil prices to optimize crude oil production and ensure sustained growth in natural gas production. We will also optimize the investment structure, improve the return on investment, add stricter control management of costs and expenses to ensure the stable and orderly functioning of production and operation as well as the healthy and sustainable financial situation striving to create value for shareholders.

We will endeavor to focus on strategic developments in resources, marketing, internationalism and innovation. We will be more devoted on low carbon green energy development, focus more on digital transformation and intelligent development, and pay extra attention to value of creation in order to actively respond to risks and challenges and strive to achieve a better performance in the year 2020.

This is the update for the first quarter financial and operational results. Now we will proceed to the Q&A session, and let's welcome the first question. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Neil from Bernstein.

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Neil Beveridge, Sanford C. Bernstein & Co., LLC., Research Division - Senior Oil and Gas Analyst [2]

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Just 3 questions, if I may. First of all, can you give us an update in terms of the CapEx plan for 2020? And how big a cut do you think you're likely to make? Secondly, in terms of oil and gas production output, I'm just wondering if there's any new guidance that we have in terms of volumes on both crude and gas. And then, thirdly, just in terms of the marketing, you showed that we'd see marketing volumes fall by 15% in Q1. Can you give us the fall for marketing volumes just in China alone? And what you're seeing in April in terms of volumes? Are we still seeing significant declines year-on-year or are we starting to see those marketing volumes recover?

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [3]

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Thanks, Neil. This is Wei Fang. I'd like to take your first 2 questions.

In regards to the CapEx and production guidance, one of the key words is that you may [found] this year is price-driven mechanism. So we have initiated a capacity enhancement program and cost-cutting program. So it is estimated that for 2020, the CapEx for the whole company will be around RMB 200 billion, down by close to 30%. But in terms of for production, the guidance is actually, we will maintain the oil production according to the prices and the natural gas price production targeted to grow at the -- at an annual growth rate of around 5%. (foreign language) The third question is -- will be answered by [Chong Lai].

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Chong Lai, PetroChina Company Limited [4]

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As for the marketing, the production has reached the marketing segment, we suffered operating loss of RMB 16.5 billion, which is mainly caused by the demand construction -- contraction as well as the inventory loss.

For the first quarter, we have limited us in the marketing segment of RMB 3.4 billion. Since the crash of the oil price and the oversupply condition of the market, it even worsened. And the situation is further deteriorated by the negative impact from the COVID-19, and we know that the oversupply is a product issue for our marketing. And currently, we do not know when the epidemic will end. Although we see the situation in domestic China is under control, but the economy is slowing down and it takes time to catch up for the consumption.

And what's more, we also had an unfair competition environment in terms of relevant tax policies. Now this is a headache that we currently have no [message]. And under such conditions, [units suffering] for PetroChina, we cannot predict a much improvement in our marketing segment.

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Operator [5]

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Our next question comes from Horace from Crédit Suisse.

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Horace Tse, Crédit Suisse AG, Research Division - Head of China Oil and Gas Research [6]

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Can you share what would be your outlook in terms of production and CapEx beyond 2020? I mean, potentially, if oil prices recovers to, let's say, $40 per barrel and above, would we kind of resume the production growth and the CapEx deployment that we've seen in the past 2, 3 years?

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [7]

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Yes. Thank you, Horace. This is a very good question. So I have to reiterate my previous comment about price-driven mechanism. So under $40 price, I think we should be -- which we should be able to maintain the CapEx scale of mid this year. So for production, probably you will be seeing -- we will maintaining a growth momentum for natural gas at, at least 5%. For production of oil, I think it will probably maintain stable. But this is a very unprecedented situation that we have seen. So hopefully, next year, the price can be even higher, and then we could have -- we'll be able to accelerate our production for oil and gas.

But in terms of budget cost cutting efforts, I think it's going to be continuing enforcement. What I can tell you is that currently, within the company, we have initiated a program that [due] to conduct, to execute a budget cut for each and every unit by 30%. And also, the management bonuses were cut by 50%. So this is a very extreme measure, particular to cope with the current situation.

Hopefully, the -- I think that the situation will be -- will also be related to how the pandemic is contained. So we have -- I think at the moment, as I just said, that I get a sense today at lunchtime, it's warm, I get a sense that the pandemic is somewhat contained in China. So hopefully, if this -- we have more good news from around the world on our common fight against the pandemic, I think you will see that the recovery, this gradual recovery of the economy and the demand. So hopefully, the price will be going up to a normal range.

So as far as PetroChina is concerned, so this is the time to do a big test for us. So I have to also still align from my colleagues in Daqing. Maybe you have heard of that. It's called (foreign language). So that actually means that if you put your money to it, water can be lost even from a dry hole. So this is the time for us to squeeze water out from the dry hole. Thank you.

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Operator [8]

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Our next question comes from Andy from Morgan Stanley.

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Andy Meng, Morgan Stanley, Research Division - Executive Director of China Energy and Chemical Research Team [9]

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I have 2 questions. The first question is on the natural gas business. So we understand you cut your selling price earlier because of the COVID-19, and this price will see in this effectiveness until late June. Just wonder whether after June, we will see the price back to the normal level or we will continue to extend this practice. And also, on the cost side, I think when the global oil price going down, gas prices going down, our import cost on the gas will also decline. So when we see the selling price and the import cost both moving, how should we think about the profit margin trend in second quarter or third quarter of this year? So this is my first question.

The second question is on the refinery and the chemical. We see the loss in the first quarter. I would just want to know whether we have an estimate or calculate a number regarding the inventory loss for both refinery and the chemical segment. So if we have that number, we can exclude this one-off loss and see what will be the recurring profit status for these 2 divisions.

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [10]

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Thank you. The first question will be answered by Mr. -- Dr. Brian Xing, and second question will be answered by Dr. [Sun Bo].

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Xing Chong, PetroChina Company Limited - Deputy Director of Investor Relations [11]

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Okay. Thank you, Mr. Wei. This is Brian. I will answer Andy's first question regarding the natural gas.

Firstly, about the natural gas price early off-season arrangement by the government, this will be ended by the end of June, as you mentioned. And after that, I think the natural gas price will be based on a demand-supply balance kind of -- decide this kind of pricing, and we will see how the demand goes. If the demand is strong, we may see a different kind of arrangement for the price.

And as for the natural gas import cost, as we mentioned, yes, it is correct. The import cost is linked with oil price. This current low oil price environment in the second quarter, we may see some lowering cost on import of natural gas and with no changes on the sales price in the profit margin or the problem are at a loss and [pursuing measures] for the imports will be lowered. Thank you.

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Sun Bo, PetroChina Company Limited [12]

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Okay, [Meng], I will answer your second question. For the inventory loss, the total number of the company in the first quarter is [10.8%]. It is -- we noticed that it's a total number of the whole company because we don't have the separate segment number in the quarter results. And in the future, we can -- as you can see that the oil price shows a very -- fluctuation. So we will -- the company will, according to the requirement of the accounting criteria, do the impairment test for the assets. And we hope that the oil price can be recovered in the second or third quarter, so we can -- there will be no more inventory loss. And I should be -- it should be noticed that it's all up to the oil price. Okay. Thank you for your question.

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Operator [13]

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(Operator Instructions) And our next question comes from Lawrence from BOCI.

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Lawrence Lau, BOCI Research Limited - Equity Analyst [14]

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Just a couple of questions. First of all, I think Mr. Wei talked about the oil production is based on oil price link mechanism. I just wondered, do we have any -- and then you also talked about cost cutting. I just wondered, do we have any target in terms of oil production that to which level you want to cut the oil production cost, say, all-in cost or cash cost to a certain level by this year. And also, with oil price falling a lot after first quarter, do you already -- cutting down your output? Or you're actually planning to cut output already?

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [15]

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Thank you, Lawrence. As I just mentioned that it's a time for the company to increase the (inaudible) in condition. So I have to go back to my previous comment about price driven. So we are -- by our -- by 30% of cost cutting, so I think -- and maintaining the production, so I think we will try to achieve breakeven for the E&P at a $40 price scenario. And if there's no -- currently, there's no further guidance. There won't be a clear guidance for production target for this year, because that the situation is very unprecedented because we've seen a sharp decline of oil prices. So I'm -- I think maybe the second -- the first half results, hopefully, you will get some more further guidance by then. At the moment is that we can -- the price-driven mechanism is applied to the E&P.

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Operator [16]

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And our next question comes from Lei Mu from JPMorgan.

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Lei Mu, JPMorgan Chase & Co, Research Division - Analyst [17]

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I have 2 questions. First is following Andy's questions. So we've seen the inventory loss has been impaired significantly in 1Q. My question would be what inventory cost that reflects in the current impairment, let's say, the ending price of Brent by March, it was $23 per barrel. Did we fully impair all the inventories to that level? Or what could price we use to impair the inventory? That's my first question.

My second question is, so we've all seen the cash flow challenge in first quarter on to the COVID-19 impact. Should we expect the cash flow to quickly recover in second quarter? And in that case, what the dividend level we should expect for the full year?

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Unidentified Company Representative [18]

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And Madame (inaudible) will answer your question.

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Unidentified Company Representative [19]

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[Interpreted] For the first quarter, our inventory loss rate impairment reached RMB 10.9 billion. And since PetroChina is upstream-heavy company, most of our impairments will happen in our upstream. That is the trading oil and also, in our downstream, the marketing also from the trading business.

[And] calculate the crude oil price is yet to be stabilized and we will take consideration of the internal and external operating environment as well as the change of oil prices, we'll do the impairment testing based on the accounting standards. At the dividend payout policy, we will take flexible measures, and we will adhere to 45% of our net profit for the [dividend] payout, and we will still stick to that.

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [20]

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And I guess I would like to add is that in the previous years, under extreme conditions, particularly when it comes to low oil prices, the company has its measures to pay a special dividend. I think if this can be also considered, maybe in the first half, and so that's the answer.

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Operator [21]

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(Operator Instructions) And our next question comes from Qin Peijing from CITIC.

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Qin Peijing, CITIC - Analyst [22]

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(foreign language)

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [23]

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(foreign language)

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Unidentified Company Representative [24]

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[Interpreted] For the first quarter, our realized the oil price was USD 54 per barrel comparing with USD 59 per barrel last year, a slight drop. And excluding the impact from the depreciation of RMB, the level is similar to last year. And we also see an increase in the sales model in the first quarter. So all of this contributed to roughly good performance of our upstream for the first quarter.

And from February, PetroChina issued a campaign of improving our quality as well as the efficiency of our operations. We initiated the renegotiating of the contracts with our service providers and third parties and try to overcome the difficulties together with our partners. And [it's happy] to see the decrease in our lifting costs in the first quarter. And we believe in the second quarter, the lifting cost will continue declining. But as for the profit in the second quarter, we suggest you -- in your tender, [CNOOC's] -- others to release and then maybe they have better say in the profit in the second quarter.

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Unidentified Company Representative [25]

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[Interpreted] As for the processing loads for the refining sector, for the first quarter, processing load is roughly around 75%, and we expect this number to climb to 80% in the second quarter.

And in the first quarter, under the -- over the -- under oversupply situation in the refining market, we adjusted our production mix. And for the refining and chemicals, which produced more chemical products that is more market oriented, more needed. For example, the medical-purpose used polypropylene. And for polypropylene, the production volume increased by 15.2% in the first quarter. We also increased production of diesel and gasoline. As for gasoline, currently, we take the biggest market share in domestic China, which is probably around 30%. And we're also happy to see that the diesel-gasoline ratio will be -- has already been increased from the normally 1.04 to 1.31 in April.

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Wei Fang, PetroChina Company Limited - Assistant Secretary of the Board [26]

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Thank you. I think I don't see any further questions. If that is the case, let me wrap up to this conference call. So I think we all suffered from setbacks in recent days because of the mark down with the [falling] economy, but I do see a grain of hope from the recent -- from China's recent successful containment of the outbreak of COVID-19.

Let me end today's conference call by quoting a famous line by Li Bai. It's like -- this is like this, (foreign language).

In English, it means that wave and wind will be -- will always be there. We are ready to [splash and sail].

Here, on behalf of my team at PetroChina, we wish you all stay safe, stay healthy, stay prosperous. Hope to see you soon in Hong Kong, Shanghai, Shenzhen and Beijing. Thank you.

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Xing Chong, PetroChina Company Limited - Deputy Director of Investor Relations [27]

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Ladies and gentlemen, this concludes the analyst conference call today. If you have any further inquiries, please feel free to send your questions to PetroChina Investor Relations. Their e-mail at hko@petrochina.com.hk. Thank you again for joining us today. Operator, this concludes this operational conference call today. Thank you.

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Operator [28]

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Thank you. That concludes today's call. You may now disconnect. Goodbye.

(Portions of this transcript that are marked (Interpreted) were spoken by an interpreter present on the live call.)