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1、Rise of Energy Infrastructure2013 Oil & Gas Industry OutlookChina Merchant Securities (H.K.) Ltd Research DeptMichael YukDec 2012Overview Chinas energy focus is shifting from import-dependent oiltowards domestically produced natural gas. Energyinfrastructure needed. We predict natural gas pipelines
2、will be the new bottleneck inChina with only 3Tcf/y capacity by 2015, only 60% ofrequired capacity. Chinas RMB1tn infrastructure spending and rise in NOCscapex will pave way for new construction projects. Brent crude oil should remain steady averaging US$110/bblduring 2013. This will continue to enc
3、ourage new investmentin production, benefiting equipment and service providers. Stock picks: Chu Kong Petroleum & Nat. Gas Pipe Ltd.(01938.HK), Hilong Holdings (01623.HK), China OilfieldServices (02883.HK).Table of ContentsChinas energy developmentOutlook for oil majorsMid/Small cap stock picksTcfCh
4、inas vast natural gas reservesChina & U.S. natural gas reserves1000900800700600500400300200100Population0USAChinadensity of400+people/ km2Source： IEA, EIA, China Ministry of Land & ResourcesChinas Ministry of Land & Resources estimates China has 25.1Tcm or 886.0Tcf ofexploitable onshore shale gas re
5、serves, almost double current U.S. reserves.However, population density is still heaviest along coastal regions.Hence, the nation needs to rapidly develop it gas natural gas transmission networkChinas natural gas reach far behind USSource：CNPCThe length of Chinas natural gas pipeline network is only
6、 1/8th of the US.Chinas NDRC has set the goal of doubling total gas pipelines from 50,000km to100,000km by 2015.Aggressive pipeline expansion is part of the countrys energy security plan.New pipelines skewed towards natural gasDia. 4-10 in.12-20 in. 22-30 in. 32+ in.Total4-10 in.12-20 in. 22-30 in.
7、32+ in.TotalAreaKMGas PipelinesKMCrude Oil PipelinesUS6402563201,216347494321201,334Canada230230139139Latin America20249646744717717Asia-Pacific483022,4784,4757,3049632128EuropeMiddle EastAfrica1,5621,562-427427-Total Gas481,1443,2306,63411,0561307814321,4032,746World TotalGasCrudeTotal481301781,144
8、7811,9253,2304323,6626,6341,4038,03711,0562,74613,802Source: OGJIn 2012, operators completed over 13,800km of oil and gas pipelines at a cost ofUS$39.6bn.Completed pipeline construction rose 6.7% from the previous year.Natural gas making up 78% of total new pipelines, with Asia-Pac comprising 66% of
9、new gas lines.-Global pipeline construction to accelerateDia. 4-10 in.12-20 in. 22-30 in. 32+ in.Total4-10 in.12-20 in. 22-30 in. 32+ in.TotalAreaKMGas PipelinesKMCrude Oil PipelinesUSCanadaLatin America362611838221,8291,200195941455,1873,7422,0835,4054821,629254707453473,4421,5143474,6303,187949Asi
10、a-Pacific3041,3555,72215,42222,8031073123,2453,664Europe4211,5634,3866,370883883Middle East248406544,5895,298469480949Africa21214,1044,146Total Gas9343,67510,56334,67449,8465762,6771,5799,43014,262World TotalGasCrudeTotal9345761,5103,6752,6776,35210,5631,57912,14234,6749,43044,10449,84614,26264,109S
11、ource: OGJFor projects after 2012, more than 64,000km of new pipes are to be laid, spendingroughly US$203bn.Gas-to-crude oil pipeline ratio 3.5:1.Asia-Pacific will account for 41.2% of new pipes or 26,467km (more than twice theEarths diameter).Gas pipelines: the new bottleneck in Chinakm 00060050040
12、03002001000Natural gas pipeline lengthbcf/y1200010000800060004000200005Tcf/y by 2015Natural gas demandChina - 2009China - 2010China - 2015U.S. - Current1995200020052010201520202025203020352040Source： EIA, CMS (HK) Ltd.Chinese government plans to boost natural gas 10% of total energy consumption by20
13、20. Gas demand by 2035 to reach 11Tcf/y, with 5%annual growth.However, we estimate China will only have 3.0Tcf/y of pipeline capacity by 2015,2.0Tcf/y less than natural gas demand.NOCs operate trunk pipelines, while local transmission networks are operated byvarious local distribution companies. Thi
14、s has prevented the emergence of a nationalgas transmission grid in China.Major pipeline contractsLarge Scale Pipeline ProjectsPetroChinas WEPP IIPetroChinas WEPP IIIWEPP III BranchlinesEast Siberia Pacific Ocean oil PipelineMyanmar-to-China crude oil pipelineMyanmar-to-China gas pipelineWEPP IVWEPP
15、 VTotalCompleted5,471km8,000km922km2,402km2,806kmPlanningPlanning19,671kmSource： CNPC, CMS (HK) Ltd.There are already over 19,000km of pipeline projects on hand.Major pipeline projects to watch include:1. The twin barrel Myanmar-China pipeline, which will cost an estimatedUS$2.54bn to compete.2. WEP
16、P III (ex-branchlines), estimated cost for the should be approximatelyUS$14.6bn.Infrastructure spending supports hypothesisSource: Davis LangdonAt over US$900bn spent during 2011, China drives global infrastructure spending.A RMB1tn (US$158bn) infrastructure spending plan was recently approved by th
17、egovernment. Projects will begin construction over the next 1-2 years.To avoid over-stimulating, the government wants to wean away from housing and“bridges to no where”. Energy related infrastructure projects provides good alternative.NOCs E&P spending balloonsRMBmn300000PetroChinaSinopecCNOOCRMBmn9
18、0000PetroChina nat.gas & p/l spending800002500002000001500001000005000007000060000500004000030000200001000002006200720082009201020112012E2006200720082009201020112012ESource：The Companies, CMS (HK) Ltd.China E&P capex has recovered from 2009 trough growing at 7.7% CAGR since2009 and at 10.0%yoy for 2
19、012 shows signs of acceleration.Natural gas capex has also accelerated growing by 22%yoy for 2012.All Chinese NOCs have emphasized continual increase in E&P and natural gas capexover the next 5-10yrs. Key driver: Unconventional & Shale gas.1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013
20、2014 2015 2016 2017 2018 2019 20201985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Shale could be answer to rising importsmmcm600000500000400000Without shale gas80%60%40%mmcm600000500000400000With shale gas60%50%40%30%30000030000020%200000100000020%0%-20%
21、200000100000010%0%-10%-20%Nat. gas consumptionNat. gas productionImport dependency (%)Nat. gas consumptionNat. gas productionImport dependency (%)Source： NDRC, CMS (HK) Ltd. estimatesChinas net import of natural gas has been growing at a 17% 3-yr CAGR, whiledomestic gas production has only grown at
22、8%CAGR.NDRC has set a goal of at least 60bcm/y (2,118bcf/y) of shale gas production by 2020.Without shale gas Chinas natural gas import dependency would reach 60% by 2020.With shale gas, import dependency would remain below 50%.Shale gas goal benefits drillersbcm706050403020100Shale gas production p
23、rofile70006000500040003000200010000Shales gas wells201220132014201520162017201820192020202120132014201520162017201820192020Source： NDRC, CMS (HK) Ltd. estimatesAssuming average production of 1mmcfd over the life of one gas well, we calculate677 shale gas wells need to be drilled by 2015, and over 58
24、00 wells need to be drilledby 2020.Drillers are key beneficiary of Chinas aggressive push towards domestic shale gasproduction.Table of ContentsChinas energy developmentOutlook for oil majors1) CNOOC Ltd. (00883.HK)2) Sinopec Corp. (00386.HK)3) PetroChina Co. Ltd. (00857.HK)Mid/Small cap stock picks
25、(X)17151311975Stock PickCNOOC Ltd. (00883.HK) CNOOC Ltd. is Chinas largest offshore oil producer. Upward trend in crude oil prices, will lead to12M Rolling Forward PEMean+2 Standard Deviation-2 Standard Deviationcontinued earnings improvement. With new oilfields coming online, CNOOCsproduction volum
26、e will continue to rebound duringFY13 with an estiamted 5% increase in organicproduction growth. Good cost control. CNOOCs all-in cost shouldremain at US$34.60/boe, a 1.7%yoy decline versusFY12. Nexen-Opti acquisition allows CNOOC toconsolidate the 72,000 barrels-per-day bitumenproduction capacity a
27、t Long Lake under one entity,which would facilitate a faster upgrade time.Source：CMS (HK) Ltd.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD） 2012E 2013E 2014E2012E 2013E 2014E 2012E 2013E 2014ECNOOC Ltd.(00883.HK)18.301.521.551.588.98.78.567,717 69,381 70,703Source：CMS (HK) Ltd. estimates; Base
28、d on Dec 24, 2012 closing pricesCNOOCs production has already recoveredmmboe1009080706050403020100Crude Oil and LiquidsNatural GasProduction Growth QoQ%25%20%15%10%5%0%-5%-10%1Q103Q101Q113Q111Q123Q121Q13E3Q13ESource：The Company, CMS (HK) Ltd.After a series of unfortunate events, decline in productio
29、n growth has beenCNOOCs overhang.However, production growth has bottomed and recovery will continue to accelerate.Production recovery will come from four new projects that have or will veryshortly come on line, which includes: 1) Weizhou 6-9/6-10, 2) Yacheng 13-4, 3)Panyu 4-2/5-1 adjustment and 4) L
30、iuhua 4-1.35302520151050Stock PickSinopec Corp. (00386.HK) Sinopec is Chinas largest refiner with over 50%market share in Chinas retail market.(X)12M Rolling Forward PEMean+1 Standard Deviation-1 Standard Deviation If inflation remains under control, changes in Chinasenergy policy helps boost Sinope
31、cs profitability. Upstream production continues to recover withoverseas crude oil production increasing 82.5%yoy or5.03MMbbl making up nearly three-fourths of theproduction increase. Natural gas production continues to show stronggrowth increasing 14.1%yoy to 289.78bcf as thecompanys efforts and E&P
32、 investment to increaseproduction at gas fields such as Erdos gas field andSichuan Basin begin to bear fruit.Source：CMS (HK) Ltd.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD） 2012E 2013E 2014E2012E 2013E 2014E 2012E 2013E 2014ESinopec Corp.(00386.HK)8.900.640.870.9110.57.77.459,088 82,395 85,8
33、32Source：CMS (HK) Ltd. estimates; Based on Dec 24, 2012 closing pricesRefining recovery, loss to lessenRefining Operating Profit/(Loss) - (RHS)RMB/bbl0-5-10-15-20-25-30-35Unit Profit/(Loss) - (LHS)RMBmn0-2000-4000-6000-8000-10000-12000-14000Source：The Company, CMS (HK) Ltd.Sinopecs refining operatio
34、ns would turn profitably if only the current refinedproduct pricing mechanism were fully followed.We estimate refining loss of RMB28.5bn for FY13E, 20% less than FY12E.302015105PetroChina Co. Ltd (00857.HK) PetroChina is Chinas largest integrated oil major.(X)12M Rolling Forward PEMean+1 Standard De
35、viation-1 Standard Deviation Higher earnings multiple relative to other Chinese oilmajors.25 Most leverage to changes in government policy, e.g.resource taxes and special oil gain levy (upstreamE&P), refined product price liberalization (refiningdivision), natural gas pricing reform (natural gas &p/
36、l division). Expecting stable production in FY13 with productionincreasing 3%yoy to 1,360mmboe.Source：CMS (HK) Ltd.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD） 2012E 2013E2014E 2012E 2013E 2014E2012E2013E2014EPetroChina Co. Ltd(00857.HK)10.550.650.710.7413.112.011.5131,220 143,037 149,683Sour
37、ce：CMS (HK) Ltd. estimates; Based on Dec 24, 2012 closing pricesNatural gas business becoming second overhangOperating Profit - Natural gas & P/LRMBmn800070006000500040003000200010000-1000 1Q113Q111Q123Q121Q13E3Q13E-2000Source：The Company, CMS (HK) Ltd. PetroChinas natural gas business has turned lo
38、ss-making due to rising natural gasand LNG imports. Natural gas business will continue to be loss-making if natural gas pricing reformis not implemented. However, compared to Chinas refined product price reform, natural gas pricingreform is much more difficult.Table of ContentsChinas energy developm
39、entOutlook for oil majorsMid/Small cap stock picks1. Chu Kong Steel Pipe (01938.HK)2. Hilong Holding (01623.HK)3. China Oilfield Services Ltd(02883.HK)HK Listed Oil Service and Equip CompaniesMarket Cap PricePE (X)EPS (RMB)EPSCARGCompany NameTicker(HKDmn) (HKD)1112E13E1112E13E11-13EOilfield Service
40、ProvidersChina Oilfield ServicesAnton Oilfield ServicesSPT Energy Group02883 HK03337 HK01251 HK84,951.17,890.35,566.315.943.663.6513.241.416.312.528.416.010.920.812.90.9000.0370.1801.0290.1050.1841.1780.1430.22816.2%100.0 %12.5 %Equipment ProvidersShandong MolongHongua GroupCIMC EnricChu Kong Steel
41、PipeHilong HoldingChina AutomationShengli Oil&Gas PipeAnhui Tianda Oil Pipe00568 HK00196 HK03899 HK01938 HK01623 HK00569 HK01080 HK00839 HK8,062.98,843.29,399.43,882.84,105.72,155.21,910.01,370.43.182.716.803.822.582.080.751.368.421.89.710.710.313.016.353.9N/A13.314.310.29.78.528.29.1N/A10.611.58.28
42、.26.717.214.80.2100.0520.6610.2300.2100.1940.0380.070N/A0.1660.3830.3040.2140.2000.0220.120N/A0.2090.4760.3750.2530.2530.0360.074N/A103.5 %(13.8%)29.7 %11.5 %16.2 %0.0 %4.4 %Offshore Equip ProvidersTSC Group Holdings00206 HK1,310.91.9211.120.627.5US$0.005 US$0.012 US$0.00932.6%Jutal Offshore Oil Svc
43、s03303 HK710.51.1357.2N/AN/A0.017N/AN/AN/AAverageMedian21.813.215.513.313.611.5Source：Companies, CMS (HK) Ltd.; Based on Dec 24, 2012 closing pricesSubsector key statisticsOil ServiceOnshore EquipmentOffshore EquipmentNo. of companiesMedian market cap (HK$mn)37,89083,99421,010Valuation (ex-earnings)
44、P/B (X)Dividend yield %Free-cash flow yield %3.30.70.81.11.8(8.7)0.90.0(4.0)GrowthRevenueGross ProfitOperating ProfitPBTNet Profit21.0N/A26.49.25.452.343.230.636.942.95.92.319.6(69.2)(80.3)Profitability RatioGross Margins %Operating Margins %Net Margins %ROAA %ROAE %30.021.113.98.816.320.910.07.45.0
45、9.829.05.32.23.56.8Source：Companies, CMS (HK) Ltd.; Based on Dec 24, 2012 closing pricesStock Pick Chu Kong Steel Pipe (01938.HK) Chu Kong is Chinas largest manufacturer of LSAW (lateralsubmerged arc weld) steel pipes. Its LSAW pipes are theonly ones that meet offshore and deep sea oil and gas usage
46、. FY13 is expected to be a strong year for sales. We expectsteel pipes sales will reached 600,000tonnes, a 20%yoyincrease versus FY12. FY12 ASP increased 10.2%yoy to RMB7,832/tonne, whichwe view as evidence that the company is able to pass-on costincreases to end users. Gross margins increased 80bps
47、 to 17.3% even though thecompany implements a “cost-plus” mechanism for its steelpipe orders, which implies company is benefiting from timelag between receiving orders and purchasing raw materials.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD） 2012E 2013E 2014E2012E 2013E 2014E 2012E 2013E 2014
48、EChu Kong Steel Pipe(01938.HK)4.100.290.350.4010.18.47.3298354407Source：CMS (HK) Ltd. estimates; Based on Dec 24, 2012 closing pricesStock Pick Hilong Holding (01623.HK) Hilong Holdings is the largest drilling pipe producer in Chinaand ranked 2nd globally (30% & 13% market share, respectively). One
49、of only three drill pipe manufacturers in the PRC withFearnley Procter NS-1 certification. At the forefront of increased drilling expenditure with sales toCNPC and Sinopec in China; Schlumberger, Weatherford, andGazprom for oversea markets. New land rigs to support strong growth in oil services divi
50、sion,which have already seen a 40%yoy increase in segment revenue.Possible valuation rerating as division matures. The company is also the dominant leader in coating material andservices capturing 60%-67% of the China market and ranked 2ndglobally.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD）
51、2012E 2013E 2014E2012E 2013E 2014E 2012E 2013E 2014EHilong Holding(01623.HK)3.200.210.270.299.97.77.2329408448Source：CMS (HK) Ltd. estimates; Based on Dec 24, 2012 closing prices Oilfield Services Ltd. (COSL) isStock PickChinaCOSL (02883.HK)offshore oil service provider, 6th globally.Chinas largest
52、International day rates continue to rise. High crude oil pricescontinue to lure increase E&P spending, which will furthersupport earnings growth. Strategic relationship with CNOOC gives virtual monopolyoffshore China and CNOOC/Nexen deal allows for expansioninto oil sands and drilling off GOM & Nort
53、h Sea. Recent semi-sub purchase quickens deepwater expansion,while HYSY981 allows for further deep-water exposurewithout stretching balance sheets. Strong operating cashflow & FCF allows COSL to expandoperations while paying down debt.Stock ticker12M TPEPS (RMB)P/ENet Profit（RMBm）（HKD） 2012E 2013E 2
54、014E2012E 2013E 2014E 2012E 2013E 2014ECOSL (02883.HK)18.001.041.291.4511.99.68.54,7005,8006,500Source：CMS (HK) Ltd. estimates; Based on Dec 24, 2012 closing pricesThank You！DisclaimerThis document is prepared by China Merchant Securities (HK) Co., Limited (“CMS”). CMS is a licensed corporation to c
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