Oil and Gas:Breakthrough in natural gas pricing mechanism

RMB0.7/cu.m gas price cut beat our estimation.

    NDRC finally announced the long-waited natural gas price cut which lowered gas price for non-residential users by RMB0.7/cu.m or 28% effective from 20th November 2015. This is the first adjustment after the merger of non-residential gas price for base volume and incremental volume on 1st April 2015. The price cut is lower than the drop in alternative energy (imported fuel oil and LPG) prices but higher than our previous projection of RMB0.4/cu.m cut. Given the aggressive cut, we believe that further cut in the beginning of 2016 is unlikely.

    Widened pricingrange facilitatesmarket-oriented price.

    Unlike previous practice to cap city-gate price, NDRC widened pricing range that suppliers and users could negotiate prices with a cap of 20% higher than the benchmark city-gate price but no downside limit. The new pricing mechanism actually facilitates market-oriented gas price as long as oil price below US$80/bbl based on our calculation. We believe it is possible that actual sales price may come below the downward-revised benchmark city-gate prices given weakened demand amid the economic slowdown.

    Uncertainties removed for upstream players.

    Upstream players are expected to suffer most from the natural gas price cut in the short-term. We estimated the RMB0.7/cu.m cut in natural gas price would reduce PetroChina’s net profit by RMB6.8/57.5bn for 2015E/16E which has been largely factored in our earnings projection model. We expect PetroChina to register a further 2% YoY slip in 2016E net profit after a 60% YoY drop in 2015E. Our 2016E earnings projection is 25% below market consensus, which is expected to revise down upon the announcement of gas price cut. Despite the short-term earnings impact, we expect PetroChina to be the key beneficiary of oil price recovery in the long run, underpinned by market-oriented gas pricing mechanism. Reiterate BUY recommendations on PetroChina and CNOOC.