Oil and Gas:What to look for amid industry reform

Oil and gas industry reform plan to come out by end 2015

    Following the issuance of “Guidance to deepen reforms of SOEs” on 13September 2015, reform plan on China oil and gas industry is underreview by NDRC and expected to come out by end of 2015. We believethat increase in competition within domestic oil and gas market bylowering the entry barriers would be the key focus of the reform.

    Pipeline restructuring on the way

    The spin-off of pipeline assets from NOCs is widely expected and webelieve possible policies would include mix-ownership and independentlisting. As the largest operator of gas pipeline in China, PetroChina alreadydisposed 50% of interests in its western section of West-East Pipeline I/IIin 2013 and proposed to dispose that of eastern section of West-EastPipeline I/II in 2014 which is still pending. We estimated the restructuringof all pipeline assets owned by PetroChina would help unlock value ofHKD2.5/share based on an undemanding P/B of 2.0x.

    Upstream E&P business opening up

    Upstream E&P sector is currently dominated by four oil majors, CNPC,Sinopec Group, CNOOC Group and Yanchang Petroleum. Severalbreakthroughs have been achieved for the opening up of the E&P sector,including the public tenders of shale gas blocks in 2011-12 andconventional oil and gas blocks in Xinjiang in 2015. We believe that theopening up of the E&P sector may bring new opportunities for private andnon-NOCs to enter this monopoly industry, but with limited impact to oilmajors’ dominant position in the near future given high entry barriers (suchas high capital cost, environmental regulations, geographic conditions andhigh level industry expertise requirements).

    Remain positive on oil majors

    We maintain our positive view on PetroChina and CNOOC given potentialsynergies brought by oil and gas industry reform and moderate recovery inoil price. China oil sector is trading at 2016E P/B of 0.7x versus ROE of7.5%, which we believe is attractive.