PetroChina’s earnings grew 2% YoY to RMB164.7bn in 2024, in line with our forecasts. The underlying earnings were actually stronger after removing the RMB14.9bn pre-tax impairment as the earnings of natural gas marketing and refining operations beat our forecasts. We expect the company to see flat earnings in 2025 assuming no more impairments with the growth at natural gas marketing and refining to make up for the decline at upstream earnings. The increase in payout ratio in 2024 was another good news for investors. Given the track records in the past three years, we now expect its payout ratio in future years to be at least 50%. We increase our 2025-26 earnings forecasts by 11-12%, reiterate our BUY call and increase our target price of its H share to HK$8.06.

Key Factors for Rating

The operating profit of its natural gas marketing segment jumped 2.4x QoQ to RMB28.7bn in 4Q24, well above our forecast of RMB17bn, on 35% QoQ growth in gas volume and higher ASP. The operating profit of its refining operations also jumped 4x QoQ to RMB6.4bn in 4Q24, RMB5.4bn above our forecast. We believe the improvement in product mix and lower cost were the key reasons for the outperformance. Indeed, its cash operating cost of refining segment dropped 3% YoY on full-year basis despite 1% YoY drop in crude oil processing volume.

On the full-year, the operating profit of its upstream segment grew 7% YoY to RMB159.7bn in 2024. Despite 2% YoY decline in realized oil price and 1% YoY increase in lifting cost, lower impairment and lower other taxes helped to lift earnings. The operating profit of its natural gas marketing segment grew 25% YoY to RMB54bn on improved profitability on wholesale business. All these more or less offset the earnings declines at other segments.

The company raises the payout ratio from 49.9% in 2023 to 52.2% in 2024.

This makes its payout ratio at about 50% or more three years in a row.

Key Risks for Rating

Sharp fall in oil price.

Significant impairments against its assets.

Valuation

We raise our target price for its H shares from HK$7.05 to HK$8.06. On top of higher earnings forecasts, it also reflects the increase in payout ratio from 45% to 50%+. Our target valuation remains 5.5% average dividend yield for coming three years (rolled over from 2024-26E to 2025-27E).

We also lift our target price for its A shares from RMB10.07 to RMB10.90. We still base our target price on its 3-month average A-H premium which has narrowed from 53% to 45% since mid-December 2024.

Reserve Replacement Ratio at 5-year High

In 2024, the company’s reserve replacement ratio of its proved oil and gas reserves reach 1.0x. This is the highest level in five years. This should relieve the concerns that the company will see its oil & gas output peak out soon. The blended reserve life stood at 10.8 years by the end of 2024 (6.6 years for crude oil and 14.2 years for natural gas).

Expect Flat Earnings for 2025 Assuming No More Impairments

We expect the company to see flat earnings in 2025 assuming no more impairments.

While we expect its upstream earnings to drop 8% YoY in 2025 as we expect lower oil price (average price of Brent to drop 10% to US$72/bbl), it will be largely offset by the growth at natural gas marketing segment and refining operations. Further growth in domestic gas sales volume, especially higher margin retail sales, will drive the growth of the former. The company targets to raise its retail gas sales ratio from about 25% in 2024 to 40% by 2035. We also estimate its refining margin to improve US$0.3/bbl YoY in 2025.

Market Cap Management Becomes a KPI of Senior Management

The company has put forward the Market Cap Management Measures and made market cap management a KPI of its senior management. In order to support its share price, the company can deploy but not limited to cash dividend, management share incentive scheme and share buybacks. The company’s board has approved the buyback for up to 5% of its H shares and A shares and the buyback scheme is still subject to approvals from shareholders.

This means the company will give supporting share price a higher priority. This will provide comfort to investors when the current oil price outlook is less favourable.

Changes in Earnings Forecasts

We increase our earnings forecasts of the refining operation and natural gas marketing segment given their higher-than-expect earnings in 4Q24. Meanwhile, we lower our earnings forecasts of the upstream segment given the higher-than- expected cost in 2024. Overall, we increase our earnings forecasts by 12%/11% for 2025/26.