PetroChina’s net profit grew 2% QoQ to RMB43.9bn in 3Q24, 41% above our forecast. The gap mainly came from the upstream segment which surprisingly posted higher earnings despite decline in realised oil price. Looking ahead, we expect its earnings to drop 26% QoQ in 4Q24 on further decline in oil price and higher expenses. We reduce our 2024-26 forecasts by 5-11% after post results adjustments and lowering our oil price forecast for 2024 (Brent from US$84/bbl to US$80/bbl). Given the attractive dividend yield of its H shares, we reiterate our BUY call with target price reduced to HK$8.03.

Key Factors for Rating

The operating profit of its upstream segment surprisingly grew 8% QoQ to RMB52.6bn in 3Q24 despite a 5% QoQ drop in realised oil price. The negative impact of lower oil price was more than offset by lower windfall tax and resources tax, lower exploration expenses (down RMB1.8bn QoQ) and slightly higher gas price. The company also booked the subsidy for tight gas production (instead of in 4Q as its usual practice) as it received the money earlier this year.

In addition, the operating profit of its natural gas marketing segment surged 89% QoQ to RMB8.5bn on smaller loss on imported gas and slightly higher gas price. All these overwhelmed the earnings declines at the other segments.

For 4Q24, we now expect its earnings to drop 26% QoQ. The key driver will be the significant earnings decline at its upstream segment on further decline in oil price and the booking of higher costs, including exploration expenses. The expected higher earnings at the natural gas marketing segment and the recovery at the oil downstream segments is just too little to change the big picture as its upstream segment accounted for 77% of its operating profit in 9M24.

Despite cuts in our earnings forecasts, the company’s H shares still offer attractive dividend yield of 7.5-7.7% for 2024-26E.

Key Risks for Rating

Sharp fall in oil price.

Significant impairment against its assets.

Valuation

We reduce our target price for its H shares from HK$8.65 to HK$8.03 to reflect the cuts in our earnings forecasts. Our target valuation is still 5.5% average dividend yield for 2024-26E.

We also lower our target price for its A shares from RMB11.15 to RMB10.82. We still base our target price on its 3-month average A-H premium, which has expanded from 41% to 47% since late August.