PetroChina Plans Eastern Pipelines Spin-Off - Analyst Blog

Chinese energy giant, PetroChina Co. Ltd. PTR intends to spin-off its Eastern Pipelines business to create a wholly-owned subsidiary – PetroChina Eastern Pipelines Co., Ltd. – to diversify its ownership structure and bring in outside capital.

This proposed affiliate will comprise two of PetroChina's West-East gas pipelines. The assets under consideration are valued at around RMB29 billion or RMB39 billion by two agencies, respectively, subject to final valuation by the parent company, China National Petroleum Corporation.

PetroChina's new subsidiary is expected to hold about RMB10 billion as capital and is to be incorporated in the Shanghai Pudong New Area. Notably, PetroChina plans to transfer its equity interest in the new venture to other parties in due course.

PetroChina is the largest integrated oil company in China and performs operations under four segments, namely, Exploration & Production, Natural Gas & Pipelines, Refining & Chemicals, and Marketing.

As one of the two Chinese integrated oil companies, PetroChina is well positioned to capitalize on the country's favorable trends. However, several factors weigh against it. The Chinese government plays a significant role in the company's earnings. With the government capping the pricing of refined-products, PetroChina is unable to pass the high refining costs to consumers and consequently has to bear the same itself.

Moreover, PetroChina's high exposure to significantly mature producing areas could limit oil production growth. The rise in the company's operating expenses is another concern. In 2013, PetroChina spent roughly RMB2,069.5 billion on operating activities, higher than RMB2,020.8 billion and RMB1,821.3 billion expended in 2012 and 2011, respectively.

The company currently carries a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked players from the broader energy sector like Encana Corporation ECA, Pembina Pipeline Corporation PBA and Matador Resources Company MTDR. All these stocks sport a Zacks Rank #1 (Strong Buy).

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