20161129-招商证券_香港_-Moderate_recovery_ahead_37页_2mb_2mb

China Oil and Gas Sector - 2017 Outlook Summary

Core Content

The report outlines the outlook for the China oil and gas sector in 2017, highlighting a moderate recovery in oil prices, upstream capital expenditure (capex) growth, and the ongoing reforms in the natural gas pricing mechanism. It also provides an analysis of key players and their financial performance.

Main Points

1. Oil Price Outlook

• Moderate Recovery: The report anticipates a moderate recovery in oil prices for 2017, with an estimated range of US$45–55/bbl, up from US$45/bbl in 2016.
• OPEC Production: OPEC production is nearing its peak, with Saudi Arabia, Iraq, and Iran being the main contributors. The production increase is expected to be minimal in 2017.
• US Shale Production: The US shale industry, particularly in the Bakken region, has seen a drop in breakeven prices due to improved well performance and cost efficiency. However, the low breakeven price is not sustainable in the medium to long term.
• Key Price Level: A US$60–65/bbl price range is considered the safe level to prevent a significant rebound in US supply.

2. Upstream Capex

• Upward Pressure: Upstream capex in China is expected to see a 10–15% YoY increase in 2017 due to oil price recovery.
• Global Integrated Oil Companies: Despite a 2% decline in total capex, the majority of the 21 leading integrated oil companies are expected to increase capex in 2017, with an average 7% YoY growth.
• Independent E&Ps: Independent E&Ps in North America are more aggressive in expanding capex, with an estimated 26% YoY increase in 2017.
• Drillers Cautious: Offshore and onshore drillers remain cautious about new investments due to low rig utilization, with capex falling by 46% and 8%, respectively.

3. China Oil and Gas Reforms

• Pipeline Pricing: The reform of the natural gas pipeline pricing mechanism has seen progress, with the new net-back pricing method and a transmission tariff mechanism introduced in 2016.
• Gas Price Cut: A RMB0.4/cu.m cut in gas price is expected, driven by lower city-gas prices and transmission tariffs.
• Pricing Limitations: The current gas pricing mechanism has limitations, including a 41% premium over alternative energy prices and high transmission costs (50–70% of retail gas price) in coastal areas, which reduce competitiveness.
• Demand Growth: China's natural gas demand is expected to grow at a 13% CAGR from 2015 to 2020, despite a slowdown in Q2–Q3 2016.

Key Information

4. Company Analysis

5. Investment Recommendation

• The sector is upgraded from NEUTRAL to OVERWEIGHT due to the moderate recovery in oil prices and potential capex growth.
• CNOOC and SSC are preferred due to their earnings turnaround and valuation discounts compared to global peers.
• Sinopec Kantons is highlighted as a strong logistics player with attractive valuation and solid earnings growth outlook.

Conclusion

The report suggests a positive outlook for the China oil and gas sector in 2017, driven by moderate oil price recovery and reforms in the natural gas pricing mechanism. While the US shale industry may pose a challenge to oil price growth, the long-term oil price is expected to remain around US$75/bbl. Upstream capex is anticipated to increase, and the sector is viewed as a good investment opportunity with CNOOC, SSC, and Sinopec Kantons being the top picks.