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Edited Transcript of 601857.SS earnings conference call or presentation 30-Mar-17 9:00am GMT

Thomson Reuters StreetEvents

Annual 2016 PetroChina Co Ltd Earnings Presentation (Chinese, English)

Hong Kong Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of PetroChina Co Ltd earnings conference call or presentation Thursday, March 30, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Wang Yilin

PetroChina Company Limited - Chairman

* Chai Shouping

PetroChina Company Limited - CFO

* Wang Dongjin

PetroChina Company Limited - President

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Presentation

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Unidentified Company Representative [1]

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Dear friends, good afternoon. Thank you for participating in our 2016 results announcement. Please allow me to introduce people on the stage. Mr. Wang Yilin, Chairman of PetroChina; Mr. Wang Dongjin, Vice Chairman and President; Mr. Huang Weihe, Vice President; Mr. Chai Shouping, CFO; and Wu Enlai, Board Secretary. Thank you.

Today, we have four sessions, Chairman's introduction, 2016 financial results and analysis, 2016 operational results, and outlook for 2017. Lastly, Q&A. Now I give the floor to Chairman Wang.

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Wang Yilin, PetroChina Company Limited - Chairman [2]

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Distinguished guests, ladies and gentlemen, dear friends, good afternoon. I am very glad to meet with old and new friends. On behalf of the Board of Directors, management, and all the staff, I welcome you all and thank you for your support.

2016 is an unusual and challenging year, with deep restructuring of the global energy sector, low oil and gas prices, and continued oversupply in the market. Along with international peers, PetroChina faced serious and unprecedented pressure. We took active and targeted measures to deal with low oil prices. The Company made timely adjustments in its decisions based on accurate forecasts and mobilized all the staff to reduce costs, risks, and improve structures and efficiency.

As a result, we had a good beginning of the 13th Five-Year Plan period, with better-than-expected results and positive free cash flow. The foundation for future growth was consolidated, with more focus on resources and markets being responsible to investors. We allocated over 75% of our strictly controlled CapEx to E&P segment, which was in line with our strategical vision of securing resources. With the One Belt and One Road initiative, our overseas cooperation was enhanced. We expanded the marketing network, which helped us to better respond to the market and raise income.

In optimizing operations, we better balanced the upstream, midstream, and downstream business; cut domestic high-cost crude production; closed wells and blocks without marginal benefits; put processing resources to more efficient refineries, chemical plants, and facilities; reduced the diesel gas ratio; and improved the allocation of self-produced and imported gas. Our major production costs dropped.

The Company attached high importance to HSE and antiterrorism. Our business environment was generally stable at home and abroad. In deepening reform and innovation, we worked on management, technologies, and systems. Efforts were made in improving evaluation policies, linking payment with performance, piloting greater autonomy in subsidiaries, and reforming natural gas marketing system. The initiative to enlarge reserves, sales, and profits was encouraged in many ways.

During the past year, we were challenged and made arduous tangible and useful efforts. Our results could not have been achieved without your support. On behalf of the Board and management, I extend my sincere gratitude to you again.

An Asian saying goes, the world moves on in a never-ending process of the new replacing the old. 2017 is an important year when we focus on the 13th Five, reform and innovation. In face of the slower growth of demand in China, fiercer competition, higher risks overseas, we still enjoy broad prospects of the oil and gas industry, increased potential of crude prices, rigid growth of Chinese demand, cooperation opportunities brought by Belt and Road initiative, as well as solid development foundation and strengths of the Company.

Generally speaking, there are more opportunities than challenges. We are bullish on PetroChina. This year, the Company will seek steady development with strategies of resources, markets, internationalization, and innovation. We will pursue benchmarking and find management, optimized resource allocation, and production operation. HSE and energy saving to meet production targets make the Company stronger and increase earnings.

On resources and markets, we will work on E&P, expand international cooperation, build marketing capabilities, and develop new markets to enhance our competitiveness over the full value chain. In restructuring and operation, efforts will be made in adjusting business, product, and asset structures, optimizing production operation for the best overall efficiency. On management and risk control, the Company will strictly control operational risks to maintain solid financial situation and safety and environmental risks to avoid major and disastrous accidents. On reform, management relations will be made smooth to encourage initiatives at all levels. Business with different features and directions will be managed differently. Market mechanism will be improved.

Ladies and gentlemen, dear friends, the past year witnessed varied achievements and the new will see further progress. I thank you all for standing together with us through difficulties and wish you will continue to do so. I now invite my colleague to announce the 2016 results. Thank you.

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Chai Shouping, PetroChina Company Limited - CFO [3]

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Thank you, Chairman. I will review the full-year financial results.

With sustained low oil prices, we realized crude price of $37.99 per barrel, down 21.4%. In a complicated economic environment, we're aimed at steady development, focusing on quality and efficiency. Our performance was better than expected. Turnover stood at RMB1.62 trillion, down 6.3%. Operating profit, RMB60.635 billion, down 23.5%. Net profit attributable to the parent company, RMB7.857 billion, down 77.9%. Basic earnings per share, RMB0.04.

We continued to cut CapEx and adjusted the pace for project development. The annual CapEx was RMB172.3 billion, down 14.8%, another large decline since 2013. To make ends meet, we improved investment structure and strengthened sustainability.

Investment reduction in E&P centered around inefficient workload. Its RMB130.248 billion compacts accounted for 75.6% of the Company's total. In terms of cutting costs and enhancing efficiency, our lifting cost was $11.67 per barrel, down 10.1%, thanks mainly to our low-cost strategy to continuously seek cost cut potentials. The employee cost was RMB117.66 billion, down 0.4%. Thanks to our mechanism of linking payment with performance, we have strict control of total employment.

Pursuing the asset-light strategy, we enhanced control investment in costs, improved debt structure, leading to sound financial situation. Total asset, RMB2.4 trillion. Debt ratio, 42.7%, down 1.2 percentage points from the start of the year. Year-end ratio, 27.3%, down 1.4 percentage points.

Low oil prices encouraged us to prioritize free cash flow. Net operating cash flow stood at RMB265 billion, up 1.5%. Free cash flow, RMB84.125 billion, up RMB40.56 billion or 93.1%.

The E&P segment acted on cost-efficiency principle to arrange production. Domestic business tried hard to control losses and overseas development stayed stable. Due to jumping prices, we realized operating profit of RMB3.148 billion, down RMB30.81 billion. Dropping oil and gas prices cut profit by RMB64.359 billion, respectively, RMB50.189 billion for oil, and RMB10.236 billion for gas. Dropping sales, mainly of crude oil, cut profit by RMB4.66 billion. Dropping OpEx and other costs raised profit by RMB38.2 billion, among which less purchase contributed RMB12.7 billion.

Equity disposal of Central Asia pipeline company contributed RMB24.5 billion. Refining and the chemicals business focus on controlling costs and improving resource flow and product mix based on the market. Our main technological and economic indicators show better results, with sustained profitability contributing to the Company. The operating profit was the highest since IPO at RMB39 billion, up RMB34 billion.

Thanks to optimized operation and higher gross profit, the refining business realized operating profit of RMB27.5 billion, up RMB22.8 billion. Higher gross profit contributed RMB29 billion. Gas processing volume cut RMB1.69 billion. OpEx and other costs cut RMB4.8 billion.

Taking the opportunity of a better market, the chemicals business tried to produce and sell more profitable products, leading to an operating profit of RMB11.4 billion, up RMB11.2 billion. Lower price cut profit by RMB6.3 billion. Higher sales contributed RMB10.2 billion. OpEx and other costs contributed RMB7.39 billion.

In the face of slower demand growth of oil products and fierce competition, our marketing business enhanced profitability. Operating profit stood at RMB11.048 billion, up RMB11.5 billion, among which RMB5.5 billion was domestic, up RMB9.2 billion. Gross profit contributed RMB8.5 billion, and sales, RMB1.3 billion. The other RMB5.5 billion was from overseas with improved import and export.

For natural gas and pipeline, confronted with slumping prices, we cut procurement costs and improved resource allocation, marketing the pipeline network efficiency, leading to an operational profit of RMB17.8 billion.

Excluding investment returns of RMB22.8 billion from pipeline integration, operational profit went down by RMB10.5 billion, mainly attributable to lower natural gas prices in China. Sales of domestic gas and pipeline business cut profit by RMB8.1 billion, among which lower prices cut RMB15.8 billion and pipeline contributed RMB7.2 billion. Less loss of imported gas and LNG contributed RMB1.4 billion. Other factors cut RMB26.6 billion, especially the investment returns from pipeline integration.

PetroChina has maintained a stable payout policy, bringing good returns to shareholders. To extend our appreciation, the Board has decided, while maintaining the 45% payout ratio, we will pay another special dividend of RMB0.020 per share. Plus the year-end dividend of RMB0.038, the full-year dividend is RMB0.059, including applicable tax.

Now my colleague, Mr. Wang Dongjin, Vice Chairman, will talk about 2016 operational results and outlook for 2017.

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Wang Dongjin, PetroChina Company Limited - President [4]

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Thank you, Mr. Chai. Next, I will present PetroChina's performance in 2016 and the outlook for 2017. 2016 was a difficult year for production and operation. Chairman Wang has talked about it.

International oil prices dropped below $30 per barrel and average prices of crude from OPEC members was only $40.76 per barrel, the lowest since 2004.

At the end of 2015, Chinese domestic gas prices were cut. Facing unprecedented difficulties and pressure, PetroChina staunchly upheld robust development, implement strategy of resources, market, internationalization, and innovation, and focused on oil and gas business. Ultimately, we saw 13th Five-Year Plan to a good start.

In 2016, our operation was stable and under control with a better-than-expected performance. Mr. Chai has introduced it. We achieved targets, controlled loss, and tapped potential in domestic E&P. PetroChina domestically focused on key basins and blocks for preliminary and fine oil and gas exploration. 22 milestones were achieved, including six oil, 10 million ton, and five 100 BCM and compartmentalized reserves. 12 discoveries were made in new blocks and areas. Throughout the year, 130 BCM predicted gas geological reserves were found.

Proper management led to sound oil and gas production and operation. Production in [Changqing] stayed above 50 million tons of equivalent. [Morensee Luwangyow] finished building of its 11 BCM capacity and supplement facilities. [Chowling Wayuen] was spilled into a national shale gas demonstrated area. Shale gas production in 2016 was 2.84 BCM. Each oil and gas field optimized its E&P plan, tapped potentials, and enhanced effectiveness.

Per-unit lifting cost and the staff size both went down materially. Loss was controlled and better than expected. We achieved growth in overseas projects, albeit a tough environment. Efforts were made in targeted projects. Quality reserves were found by progressive explorations in [chart] and Indonesia and can soon be recovered. Block 58 in Peru started commercial development. We optimized development, made dynamic adjustment to production based on oil prices.

Oil output in Iraq was up 3.7% year on year. Overseas key capacity building progressed steadily with chart phase 2.2 and project MPE3 0.165 million barrels per day expansion underway on schedule. With the Belt and Road initiative, we won the bid for exploration in block five Kazakhstan and boosted integrated project in Iraq. We press ahead with joint venture corporations.

Equities of transnational gas pipeline company were transferred with cost cuts and improved effectiveness by unit-lifting cost. All-in costs dropped over 20%. Labor costs down over 9% in 2016. We realized a crude output 0.921 billion barrels, down 5.3% year on year. Marketable gas output, 3.27 trillion cubic feet, up 4.6% year on year.

In 2016, we achieved new height in refining and chemical business. Production and operation were further optimized. We refined 0.953 billion barrels of crude, down 4.5% year on year. Produced 0.022978 billion tons of chemicals, up 3.6% year on year. We adjusted product mix and the high-efficiency products share was up 5.5 percentage points. We saw lucrative chemicals outputs, such as synthetic resin and synthetic rubber, up 10%. We well organized engineering and construction and finished 23 gasoline on diesel upgrading projects by fifth national standard.

We enhanced our marketing capability. Fields were marketed both in China and abroad. We prioritized our refined products for sales, utilized external resources, and increased fuel exports. In 2016, we sold 0.16 billion tons of fuels, almost the same as last year. But gasoline up 2.9% and kerosene up 12.6%.

We exported 7.205 million tons of fuels, up 12.2%, sold 75.44 million tons by station [gas], realized nonfuel profit of RMB1.7 billion, up 17.2%. We better organized import and export, expanded processing business, explored overseas premium market, and realized 320 million ton trade volume, up 6%. We achieved growth and effectiveness in natural gas business. We sold 183.2 BCM of gas, up 15.9% year on year. We allocated resources to effective high-end market. 77% of marketing was in [Bohareem] region and [Yong] River Delta.

Over 90% was CD gas and used in industry and power generation. We improved pipeline network. Each session of West-East gas pipeline number three and (inaudible) went on stream. China Russia group had line number two. East China Russia gas pipeline and Shaanxi-Beijing pipeline number four started construction.

We pushed forward gas marketing and pipeline business reform, built 5+1 marketing subsidiaries, finished [end business] merge of Kunlun Energy and Kunlun Gas, laying groundwork for stronger marketing capability.

R&D and innovation supported our business. In 2016, we made innovations, pushed forward three R&D innovation programs, and supported business with IT technology. We pressed ahead with national oil and gas special programs, launched 36 projects and 16 demonstrative programs for 13th Five-Year Plan. About 5,000 patent applications, over 4,800, were approved.

HSE's situations improved in 2016. The Company stressed safety and environmental protection, avoided major hazards and environmental accidents. They strictly reviewed technology and management of HSE key units. Major pollutant emissions were within proper range and energy efficiency improved. Total energy consumption declined over two years. Last year, 0.87 million ton standard [co] and about 11 cubic meters of water were saved, accounting for, respectively, 134% and 138% of the targets.

In 2017, we will focus on the following. Firstly, enhanced quality and effectiveness and push core business forward. We will secure production and find new reserves, optimize refining and chemical business mix to strengthen marketing business, and ultimately improve crude profitability. We will secure stable gas output, expand market, and optimize pipeline management to create a strategic and profitable program. We will try to break new ground in international cooperation.

Secondly, deepen reform by implementing all relevant measures to promote reforms of mixed ownership being market based and three institutions.

Thirdly, find new development engines with innovations to drive growth with R&D, to speed up digital transformation, to innovate in management, and to strengthen talent training.

Fourthly, ensure sound HSE performance with [through a floor]. We will increase HSE regulative capacity, actively help to resolve air pollution in Beijing, Tienjin hub region, and secure supply of clean energy and fulfill our CSR.

As international oil prices rally this year, we will try to secure oil output, increase gas output, and do more in explorations. We will focus on oil explorations in Erdos, Northwest [Chunga], Songliao Basin, and gas explorations in Erdos, Xinjiang, and Sichuan basin. We will press ahead with unconventionals explorations in [Chung seven], Erdos, [tightwell in Somalia], and shale gas in Sichuan.

We will prioritize overall effectiveness, focus on oil projects in [Mah 18] and [Hallahaton] in [Chingchan] in key gas projects in Songliao, Changqing, and [Xinjiang] [wavein]. We will make fine interpretation on reserves of mature oilfields, apply fine flooding, and continue with secondary development to secure output. We will properly organize gas production, control key gas flows in multiple levels dynamically for production hikes and better effectiveness in CBM and shale gas.

In overseas business, we aim at quality effective development and stable growth. Our international cooperation will be in line with the Belt and Road initiative, with integrated resources and modified structure. In refining and chemicals, we will continue to optimize for higher effectiveness. For refining, we will allocate resources based on marginal effectiveness, reduce diesel gasoline ratio, produce more aviation fuel high-spec gasoline and aromatics. For chemical production, we will increase shares of products with high added value and profitability to raise profits.

We will endeavor to ensure Yunnan Petrochemicals Company start operations, proceed with North China petrochemical company, [Lauyoung] Petrochemical Company, and upgrade fuels by six national standard.

In fuels marketing, we will focus on supply sales dynamics, buying unified -- buying of external feedstock, and balance domestic supply/demand with import and export.

We will integrate fuels, cars, nonfuel products, and lubricants to raise marketing revenue and high-efficiency product sales. In natural gas and pipelines, with corporate resources and pipelines, we will optimize gas source mix for maximized profits, optimize operation of storage and transport facilities for peak [shaf] and to secure supply.

We will diversify marketing and do more to expand premium market, especially the coastal region and east China and the Pearl River Delta. We will properly organize construction of key engineering projects to ensure Shaanxi-Beijing pipeline number four and China Russia gas pipeline number two will be finished in time.

That is all for our result through our 2016 and our goal in 2017. Thank you.

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Editor [5]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.