PetroChina Expects 4Q18 Profits To Fall Amid Low Oil Prices

The year 2018 had been quite impressive for PetroChina Company Limited (NYSE:PTR) . For the nine months ended September 2018, the Chinese oil giant reported earnings of RMB 48,124 million, representing a whopping 177% increase from the year-ago period. In fact, PetroChina posted third-quarter 2018 earnings of RMB 21,036 million, which is the greatest since 2014. The robust numbers were mainly driven by higher crude prices, which started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived, with the commodity hitting a deadly downdraft since mid-October. Notably, oil prices have plunged nearly 30% since then.

More on the Headlines

Amid severe pullback in the crude prices, PetroChina expects a decline in fourth-quarter earnings. This is particularly evident from the fact that the company now expects full-year income to increase in the range of 123-132% versus a massive 177% rise in the first nine months of the year. PetroChina anticipates full-year income to increase between RMB 28,000 million and RMB 30,000 million from 2017’s earnings of RMB 22,793 million.

Notably, the company has scrapped off some assets in 2018 and anticipates net loss related to the disposal of the non-current assets to be higher than the prior year. Even if the write-downs were not accounted for, its full-year earnings would have risen only 149% (lesser than 177% in the trailing nine months). This definitely indicates a sharp fall in the fourth-quarter earnings figure as crude prices are going downhill amid supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds.

While PetroChina’s woes are largely attributed to the falling oil prices, factors like slowing economic growth of China along with U.S.-Sino trade tensions have also added to the worries. Given that the company generates majority of its revenues from China, increasing concerns over economic growth of the country have been affecting PetroChina. The Chinese economy is steeply declining of late, with trade war hurting both the country’s business and consumer confidence. Markedly, China’s industrial production has slowed down and retail sales growth hit a 15-year low in mid-December. In fact, the country’s economic growth in 2018 was the slowest in 28 years, owing to massive debt concerns and trade tiff.

Intensifying trade tensions between China and the United States have weighed on the growth prospects of many Chinese companies including PetroChina. With both the parties refusing to back down on the tit-for-tat tariff war since July, the trade tussle between the world's two biggest economies has been ratcheting up, adding to the jitters.

Evidently, for the three months ended December 2018, the share price performance of PetroChina had been weak. The stock plunged 25.7% over the said time frame.

Trying Times Ahead?

Limited international operations raise concerns as the company can witness a rougher patch in case of further economic deceleration. While the United States and China have temporarily put their trade war on hold, the uncertainty definitely lingers. The trade tensions have raised a red flag about increasing slowdown in the Chinese economy, which remains a concern.

PetroChina’s persistent marketing headwinds, reflecting slow domestic refined products’ demand growth and fierce competition, also keep us worried. We are also concerned of the production prospects of the company amid weak crude prices, considering its heavy exposure to significantly mature-producing areas. Notably, in the first nine months of 2018, crude oil output — accounting for 60% of its total production — inched up a mere 0.5% from the year-ago period.

Considering all these factors, we are not very optimistic about PetroChina at this moment.

Zacks Rank and Key Picks

PetroChina currently carries a Zacks Rank #5 (Strong Sell). Meanwhile, investors can opt for some better-ranked stocks such as Bellatrix Exploration Ltd. (TO:BXE) , TransCanada Corporation (TO:TRP) and RGC Resources Inc. (NASDAQ:RGCO) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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