Minimal earnings and reserves accretion. Assuming that PetroChina buys out the remaining 54.5% interest, the total transaction value would be around US$2.4bn (including net debt). PetroChina should have no problem funding this transaction because recall that it aims to raise US$22bn in debt this year. Based on the Bloomberg-consensus forecasts, we see minimal earnings accretion for FY09 and less than 1% earnings accretion for FY10 and FY11. SPC has 21.8mmboe of proven oil and gas reserves currently, which is around 0.1% of PetroChina’s existing total oil and gas proven reserve base. Currently, PetroChina’s refining capacity is around 2,600,000bbl/d and this acquisition will boost it by about 5.6%.
Expensive price tag (earnings-wise) and regional refining outlook not too promising. Based on the Bloomberg forecasts, PetroChina is paying PERs of 18.4x and 14.6x (based on the acquisition price) for FY09 and FY10, respectively, which is at the high end of its PER band chart. Furthermore, we are negative on the Asia refining sector due to the prospect of a strong ramp-up in global refining capacity over the next few years, which would be likely to depress regional refining margins. Based on replacement cost, we believe the acquisition price is fair, as it factors in around US$13,000 per bbl/d of refining capacity and around US$10/boe for proven oil and gas reserves.
Expanding its international business. SPC owns a 50% interest in a nameplate 290,000bbl/d refinery in Singapore (95% utilisation rate and achieved gross refining margin of US$5.50/bbl in FY08). SPC has interests in oil and gas E&P properties in China, Indonesia, Vietnam, Cambodia and Australia, with total oil and gas production in FY08 of 3.1mmboe. SPC also conducts storage and distribution and trading of crude and refined petroleum products.Valuation
PetroChina is now trading at a PER of 11.6x (based on an average WTI oil price of US$68/bbl) with a dividend yield of 3.5% on our FY10 forecasts.
SPC is more of a downstream company, and the rationale for such an acquisition is questionable, in our view. We would have preferred PetroChina to have acquired pure upstream assets instead with US$2.4bn. Nevertheless, despite the slightly high price tag and minimal earnings accretion for the next few years, we believe the market will view this acquisition positively as PetroChina starts its international expansion. We reiterate our 3 (Hold) rating on the stock on valuation grounds, and our six-month target price of HK$6.10, which is based on an average of: 1) a target PER of 8x on our FY09 EPS forecast, and 2) a DCF valuation that uses a long-term normalised WTI oil-price assumption of US$85/bbl.
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