china gas demand oil & gas -...
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This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
View HSBC Global Research at:
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THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)
4M16 implied gas demand increased 15% y-o-y, compared to
single digit growth in 2015; lower gas prices boosted demand
Half of incremental demand is met by imports; year-to-date,
import costs have fallen 34% y-o-y, to RMB1.4/cm
PetroChina benefits most from pricing policies which are
expanding gas demand; gas import loss should narrow
YTD2016 implied natural gas demand is strong at 15%, more than 2x GDP
growth. We define total gas demand as the sum of total supply less exports, with no
inventory adjustment as none is available. Through 4M16, natural gas supply totalled
73bcm, up c10bcm or 15% y-o-y, with incremental volume from domestic production
(4.6bcm/+11% y-o-y), pipeline import (3.3bcm/+27%) and LNG import
(1.7bcm/+19%). China’s National Development and Reform Commission (NDRC)
releases natural gas supply and demand data on a monthly basis, but with some time
lags than data from China Statistical Bureau. NDRC’s data shows gas demand in
1Q16 increased 15.5% y-o-y, while our total supply approach based on Statistical
Bureau data showed 1Q16 demand growing at 14.6%.
Year-to-date 4M16, domestic production increased 11% y-o-y to 48bcm, likely
from Sichuan basins (including Fuling shale gas) and offshore China.
Year-to-date 4M16 natural gas net imports were 25.3bcm, up 5bcm or 25% y-o-y.
Pipeline Natural Gas (PNG) imports increased 27% y-o-y to 15.2bcm, as average
import costs declined to USD5.7/mBtu from USD8.9/mBtu in 2015.
Liquified Natural Gas (LNG) imports increased 18% y-o-y to 10.8bcm; Sinopec and
CNOOC Group increased imports from Australia, Qatar and Papua New Guinea.
Comparable average LNG import prices fell to USD6.9/mBtu from USD8.7/mBtu.
April 2016 LNG import price reached the lowest level since 2010.
Full pass through of Nov 2015 citygate gas price cut is still not complete.
Currently, 50% of the 20 major cities that report monthly industrial end-user gas price
saw a full or partial pass-through. We expect more cities to follow, lifting demand.
Implications for our coverage. PetroChina (857 HK, Reduce) benefits from wider
pass-through of gas price cut as it is most exposed to domestic natural gas demand
volume growth. It produces c75% of domestic gas supply, supplies 100% of PNG
imports and 20% of LNG imports. Kunlun Energy’s (135 HK, Hold) LNG import
terminals will likely see utilization rates fall further as it doesn’t provide third-party
access and is expected to expand capacity at end-2016.
24 May 2016
Thomas C. Hilboldt*, CFA
Head of Resources & Energy Research, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 2922
Tingting Si* Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6590
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
China Gas Demand EQUITIES OIL & GAS
China Gas demand back on track – confirms price elasticity
EQUITIES OIL & GAS
24 May 2016
2
Gas demand is growing at double digits in YTD2016
4M16 natural gas supply totalled 73bcm, up 9.7bcm or 15% y-o-y. Most incremental volume
is coming from domestic production (4.6bcm, or up 11% y-o-y), pipeline import (3.3bcm, up
27%) and LNG import (1.7bcm, up 19%). We believe lower gas prices and colder than expected
winter in Northern China are the main reasons for the increased gas demand.
Pricing – Natural gas citygate price cut pass-through still ongoing. China’s NDRC cut
citygate gas prices for industrial and commercial users by RMB0.7/cm in Nov 2015. However,
national average selling prices for industrial users only declined RMB0.3/cm in March 2016 as
compared to Oct 2015. Of the 20 Chinese cities for which the Statistical Bureau publishes
monthly industrial gas prices, only 10 have implemented partial or full pass-through of the
citygate gas price cut. We expect more cities to follow suit to lower end user gas prices for
industrial and commercial users and that would further stimulate demand.
Natural gas vehicle market remains sluggish. New LNG vehicle sales in 1Q16 (4,093 units)
were less than half of that in 1Q15. 2016 has been a weak year for LNG vehicle sales, with only
36.4k units of LNG vehicles sold, down 62% y-o-y. We think the market may contract further in
2016. LNG:diesel price ratio recently fell below 0.7x, which is the threshold for truck drives to
consider converting from diesel to LNG trucks. The ratio would need to remain below 0.7x for a
longer period of time in order to trigger more conversions.
Domestic production’s share in total supply is coming down
4M16 domestic production totalled 48bcm, up 4.6bcm or 11% y-o-y. We believe increased
gas production from Sichuan basins, including shale gas production in Fuling (Sinopec and
PetroChina) and offshore China (CNOOC) are the main contributors. Domestic production’s
share in total gas supply has fallen from 80% in 2011 to 65% in 4M16.
Sinopec 2016 target: natural gas production at 24.5bcm, up 18% y-o-y (vs. target oil
production down 5%).
PetroChina 2016 target: natural gas production at 90bcm, up only 1% y-o-y (vs. target oil
production down 5%).
SOE to local government cooperation stepping up. Sinopec and PetroChina signed a five-year
cooperation agreement with the local government of Chongqing in May 2016. Sinopec targets shale
gas capacity and output to 15bcm and 10bcm in Chongqing by end-2020 and it will co-operate with
In this document HSBC may comment on the potential economic impact dependent on the outcome of the UK Referendum.
HSBC is not taking a political position and this document and the information contained herein are not intended to promote or
procure, or otherwise be in connection with promoting or procuring, a particular outcome in relation to the question asked in
the UK Referendum.
Natural gas supply by source and y-o-y growth (bcm, %)
Source: CEIC, HSBC
32 3848
5870
8290
106
131
150163
180 184
6373
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-20
0
20
40
60
80
100
120
140
160
180
200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 4M15 4M16
Dom. Prod LNG PNG_IMP PNG_EXP Total supply Supply growth (%)
3
EQUITIES OIL & GAS
24 May 2016
the government in stabilizing local natural gas price, oil and gas refueling station construction, shale
gas E&P and several petrochemical projects (Sinopec website, 19 May 2016). PetroChina signed a
pact with the government on 20 May 2016, to co-operate on shale gas exploration, natural gas
chemical industry, and oil and gas distribution network (Bloomberg, 23 May 2016).
Natural gas imports – fast growth, falling costs
4M16 natural gas net imports totalled 25.3bcm, up 5bcm or 25% y-o-y. 4M16 pipeline imports
increased 27% y-o-y to 15.2bcm. The majority of the incremental supply is coming from
Turkmenistan and Uzbekistan. Average import costs declined from USD8.9/mBtu in 2015 to
USD5.7/mBtu in 4M16. In 1Q16, PetroChina’s net loss incurred from sales of imported gas and
LNG in the natural gas and pipeline segment amounted to RMB6.1bn, or RMB1.1bn lower
than 1Q15.
4M16 LNG import volume increased 18% y-o-y. China’s LNG import volume in 4M16
increased 18% y-o-y to 10.8bcm, as Sinopec and CNOOC Group increased imports from
Australia, Qatar and Papua New Guinea. LNG imports in April 2016 increased 22% y-o-y and
11% m-o-m to 2.57bcm. Average LNG import prices dropped to USD6.9/mBtu from
USD8.7/mBtu last year. April 2016 import price of USD6.6/mBtu (RMB1.5/cm) is the lowest
since 2010. Qatar supply remains the most expensive while the Australia supply the cheapest;
however, the price gap between different sources continues to contract, implying increased
competition among the LNG sellers.
Significant regas capacity to be added in 2016; utilization rate to remain subdued
As at end-2015, China had 12 operating LNG receiving terminals with a total regas capacity of
38.5mtpa (52.4bcm). We expect total regas capacity to be expanded to 47.5mtpa, or 23%
higher than end-2015, due to the three new or expansion projects listed below:
Sinopec Guangxi 3mtpa LNG receiving terminal – new built, started operation in April 2016
PetroChina/Kunlun Energy Dalian LNG-receiving terminals – expansion project, capacity
may be doubled to 6mtpa (8.5bcm) by end-2016
PetroChina/Kunlun Energy Jiangsu LNG receiving terminal – expansion project, capacity
may increase from 3.5mtpa to 6.5mtpa (9.1bcm) by end-2016
China’s LNG import volume growth has been modest amid the weak domestic gas demand. We
believe the average utilization rate of the LNG receiving terminals will likely remain at a lower
level of 30-50%. In the future, LNG regas terminal operators may seek to open up its terminals
to third-party use to raise its utilizations but the progress may be slow.
China PNG import price (USD/mBtu) China LNG import price (USD/mBtu)
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015 4M16
Turkmenistan Uzbekistan
Kazakhstan Myanmar
Average (mBtu)
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015 4M2016
Qatar AustraliaIndonesia MalaysiaPapua New Guinea OthersAverage (USD/mmbtu)
EQUITIES OIL & GAS
24 May 2016
4
Name/ticker Rating TP CP Down
/Upside
Valuation Risks
CNOOC (883HK)
Reduce HKD5.55 HKD9.05 -39%
We value CNOOC using a near-term pure PB-based methodology. We assume the fair value of the shares is 0.5-0.6x book, lower than the 1x PB during the trough cycle in 2008-09, as the company is expected to generate a much lower ROE in 2016 than was earned in 2009. Specifically, we apply a PB multiple of 0.58x vs an expected three-year average ROE of 5.2% to the 2016e BVPS. Our TP is HKD5.55 and it implies 39% downside. We rate the stock Reduce.
Key upside risks: A sharp oil price recovery, production growth, effective cost control, limited asset impairments, and reduction of tax policies in countries of operation.
PetroChina (857HK/
601857CH)
Reduce on ‘H’ Reduce on ‘A’
HKD4.10/ RMB3.60
HKD5.20/ RMB7.20
-21% on ‘H’ -50% on ‘A’
Our fair value target price for PetroChina-H uses a 0.55x 2016e PB, based on a rolling 3yr average ROE of 5.5% and trough PB multiples. We believe the rally in the stock since end-January 2016 has taken the price well ahead of fundamentals. Our H-share TP of HKD4.10 implies 21% downside. Our A-share fair value target price of RMB3.6 implies 50% downside, converts the H-share target price at the HKD/RMB end-2016e rate of 1.13.
Key upside risks: a further recovery in the oil price, effective cost control, changes in tax/energy policies, and asset sales/restructurings.
Sinopec (386HK/
600028CH
Hold on ‘H’ Hold on ‘A’
HKD5.05/ RMB4.50
HKD5.10/ RMB4.70
-1% on ‘H’ -4% on‘A’
We apply a PB multiple of 0.77x vs an expected three-year average ROE of 7.7%. Our H share TP is HKD5.05 and it implies 1% downside. Our A-share fair value TP is RMB4.50 and it is calculated by converting the H-share TP at the HSBC FX team’s HKD/RMB 2016e rate of 1.13. Our A share TP implies 4% downside and we rate both share types Hold rather than Reduce as we believe holding some oil exposure is prudent, and we prefer Sinopec’s balanced profit profile.
Key downside risks: lower oil prices and R&C margins; and slower growth of the marketing business. Key upside risks: higher oil prices and R&C margins; better non- fuel business; and a potential public listing of the marketing unit.
Kunlun (135HK)
Hold HKD6.10 HKD6.09 0.2%
Our target price of HKD6.10 is derived from a SOTP approach, using: DCF for the E&P business (HKD0/sh based on a WACC of 7.8% - risk-free rate of 3%, market risk premium of 9%, beta of 1.1, cost of debt of 5.0%, and 30% debt weighting) and pipeline transmission business (HKD5.3/sh). We apply 5-9x 2016e PE multiples for other businesses. Our TP implies 0.2% upside and we rate the stock Hold.
Upside risks: Better than expect earnings growth at KG, higher volume and further citygate price cuts. Downside risks: weak E&P performance, possible transmission tariff cut, delay or cancelation of Shaanjing IV construction.
S Source: HSBC estimates, *Prices are as of market close on 23 May 2016.
China oil and gas H shares coverage – share price performance (%)
Source: Thomson Reuters Datastream, HSBC. *Prices are as of market close on 23 May 2016
-10-6 -7
-12 -12 -9-19
-1
-13 -10 -11 -10 -8
1016
0
-3
91
-16
11
-10 -11 -15
-2
27
2
-8
-26
-70
-39
22
-30 -26
-36
-13 -13
-29 -27
-45
-61
-29-20
-64
-8
-63 -67 -65
-43
-29
12 92
-12 -12-6
-30
20
-8
-23-27
-7 -10
-80-70-60-50-40-30-20-10
0102030
-1M -3M -6M -1YR YTD
5
EQUITIES OIL & GAS
24 May 2016
China natural gas supply and demand
Natural gas supply by source and y-o-y growth (bcm, %)
China gas import dependency ratio (%)
Source: CEIC, HSBC Source: CEIC, HSBC
China natural gas demand seasonality (bcm) China natural gas demand by end-user (% of total)
Source: CEIC, HSBC Source: CEIC, HSBC
32 38
48
58
70
82 90
106 13
1 150 16
3
180
184
63
73
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
25
50
75
100
125
150
175
200
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
4M15
4M16
NatGas Dom+LNG+PNG PNG_IMP (bcm)
LNG (Bcm) Dom. Prod (bcm)
Supply growth (%)
-10%
0%
10%
20%
30%
40%
0
50
100
150
200
2003 2005 2007 2009 2011 2013 2015 4M15
Domestic production (BCM)Gas supplied (BCM)Import dependence ratio (%)
0.0
5.0
10.0
15.0
20.0
25.0
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep Oct
Nov
Dec
2011
2012
2013
2014
2015
2016
81 78 76 74 70 70 70 68 65 65 64 65 66 66 65
0%
20%
40%
60%
80%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Industry Residential Transport
Services Construction Others
EQUITIES OIL & GAS
24 May 2016
6
Industrial user gas prices by cities – changes Marc 2016 vs. Oct 2015
Source: CEIC, HSBC
NDRC reported China gas supply and demand and implied inventory build/(draw)
Source: ICIS, HSBC
0.3
-0.3
0.0
-0.7
0.0
-0.2
-0.6
0.0 0.0
-0.7 -0.7
0.3
-0.8
0.0 0.0
-1.0
0.0 0.0 0.0
-0.8
-0.3
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
Uru
mqi
Xin
ing
Yin
chua
n
Lanz
hou
Xia
n
Tai
yuan
Bei
jing
Tia
njin
Zhe
ngzh
ou
Cho
ngqi
ng
Cha
ngsh
a
Sha
ngha
i
Han
gzho
u
Hai
kou
Jina
n
Nin
gbo
She
nyan
g
Xia
min
Nan
ning
Shi
jiazh
uang
Sim
ple
Avg
-10%
0%
10%
20%
30%
40%
50%
-10
-5
0
5
10
15
20
25
30
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
Domestic production (bcm) Import (bcm) Inventory (bcm) Demand (bcm) Demand y-o-y growth (%)
7
EQUITIES OIL & GAS
24 May 2016
China domestic production volume by field and producer
2015 gas production by field/company (bcm)
Source: China OGP, HSBC
2015 gas production volume y-o-y increase/(decrease) (bcm)
Source: China OGP, HSBC
Volume y-o-y changes of China’s top 10 gas blocks (%)
Source: China OGP, HSBC
37.5
23.6
15.512.2
10.56.1 5.9 3.5 3.3 3.0 1.3 1.1 0.9 0.7 0.6 0.5 0.5 0.5 0.1 0.0 0.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0P
etro
Chi
na_C
hang
qing
Pet
roC
hina
_Tar
im
Pet
roC
hina
_Sic
huan
CN
OO
C a
nd o
ther
s
Sin
opec
_Tar
im,…
Pet
roC
hina
_Qin
ghai
Sin
opec
_Zho
ngyu
an
Pet
roC
hina
_Daq
ing
Sin
opec
_Jia
ngha
n
Pet
roC
hina
_Xin
jiang
Pet
roC
hina
_Jili
n
Pet
roC
hina
_Hua
bei
Pet
roC
hina
_Tuh
a
Pet
roC
hina
_Jid
ong
Pet
roC
hina
_Lia
ohe
Pet
roC
hina
_Dag
ang
Sin
opec
_Sha
ngha
i…
Sin
opec
_She
ngli
Sin
opec
_Hen
an
Sin
opec
_Jia
ngsu
/Anh
ui
Pet
roC
hina
_Yum
en
3.6 3.52.1 1.8
0.80.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.2 -0.3 -0.7 -0.8
-2.5
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Tot
al
CN
OO
C a
nd o
ther
s
Sin
opec
_Jia
ngha
n
Pet
roC
hina
_Sic
huan
Sin
opec
_Tar
im, S
ichu
an,…
Sin
opec
_Sha
ngha
i Oce
an
Pet
roC
hina
_Hua
bei
Pet
roC
hina
_Daq
ing
Sin
opec
_Hen
an
Pet
roC
hina
_Tar
im
Pet
roC
hina
_Yum
en
Sin
opec
_Jia
ngsu
/Anh
ui
Pet
roC
hina
_Jid
ong
Pet
roC
hina
_Dag
ang
Sin
opec
_She
ngli
Pet
roC
hina
_Tuh
a
Pet
roC
hina
_Lia
ohe
Pet
roC
hina
_Xin
jiang
Pet
roC
hina
_Jili
n
Pet
roC
hina
_Cha
ngqi
ng
Pet
roC
hina
_Qin
ghai
Sin
opec
_Zho
ngyu
an
19%
15%
-4%
-35%
14%
7% 7%
2%
10%
-1%
10%
6% 9%
-12%
9%
1%
-3%
2% 5%
-2% 0%
13%
40%
8%
-11%
-30%
1%
-8%
-50%-40%-30%-20%-10%
0%10%20%30%40%50%
Pet
roC
hina
_Cha
ngqi
ng
Pet
roC
hina
_Tar
im
Pet
roC
hina
_Sic
huan
CN
OO
C a
nd o
ther
s
Sin
opec
_Tar
im, S
ichu
an,
Ord
os
Pet
roC
hina
_Qin
ghai
Sin
opec
_Zho
ngyu
an
Pet
roC
hina
_Daq
ing
Sin
opec
_Jia
ngha
n
Pet
roC
hina
_Xin
jiang
2013 YoY % 2014 YoY % 2015 YoY %
EQUITIES OIL & GAS
24 May 2016
8
China PNG import volumes and prices
China PNG import volume by source (bcm) China PNG import volume by source (%)
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
China PNG import price by source (USD/mBtu)
Source: Thomson Reuters Datastream
China PNG import volume vs. price (bcm, USD/mBtu)
Source: Thomson Reuters Datastream
14.1
21.4
27.3 31.3 33.6
12.0 15.2
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2011 2012 2013 2014 2015 4M15 4M16
Turkmenistan Uzbekistan Kazakhstan Myanmar
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 4M15 4M16
Turkmenistan Uzbekistan Kazakhstan Myanmar
8.7
10.49.4 9.6
7.5
8.9
5.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2011 2012 2013 2014 2015 4M15 4M16
Turkmenistan Uzbekistan Kazakhstan Myanmar Average
14.1
21.4 27.3
31.3 33.6
12.0 15.2
8.7
10.4
9.4 9.6
7.5
8.9
5.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2011 2012 2013 2014 2015 4M15 4M16
China pipeline gas import (bcm) China pipeline gas import price (USD/mmbtu)
9
EQUITIES OIL & GAS
24 May 2016
China LNG import volumes and prices
China LNG import by source (bcm) China LNG import by source (% of total)
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
China LNG import by company (bcm) China LNG import by company (% of total)
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
China LNG import price by source (USD/mBtu) China LNG import price by company (USD/mBtu)
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
16.6 20.0
24.5 27.1 26.8
9.1 10.8
-
10.0
20.0
30.0
-
10.0
20.0
30.0
2011 2012 2013 2014 2015 4M15 4M16
Qatar Australia Indonesia
Malaysia Papua New Guinea Others
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 4M15 4M16
Qatar Australia Indonesia
Malaysia Papua New Guinea Others
16.6
20.0
24.527.1 26.8
9.110.8
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2011 2012 2013 2014 2015 4M15 4M16
CNOOC Group PetroChina Sinopec Thruput (bcm)
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 4M15 4M16
CNOOC Group PetroChina Sinopec
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015 4M2016
Qatar AustraliaIndonesia MalaysiaPapua New Guinea OthersAverage (USD/mmbtu)
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015 2016
PetroChina CNOOC GroupSinopec Average
EQUITIES OIL & GAS
24 May 2016
10
Natural gas vehicle
China dual-fuel natural gas vehicle sales volume (units)
Source: Wind, HSBC
China LNG vehicle sales volume (units)
Source: Wind, HSBC
China natural gas price for industrial users vs prices of other replacement fuel (RMB/mBtu, %)
Source: CEIC, HSBC estimates
120,835
176,156
155,097
42,37130,179
0
40,000
80,000
120,000
160,000
200,000
2013 2014 2015 3M15 3M16Dual-fuel NGV - truck Dual-fuel NGV - bus Dual-fuel NGV - passenger vehicle Total duel-fuel NGV
77,788
97,282
36,367
9,511 4,093
0
40,000
80,000
120,000
160,000
200,000
2013 2014 2015 3M15 3M16
NGV - truck NGV - bus NGV
2.21.7
1.30.6
3.3
1.5 1.2
-34%
-50%
-76%
27%
-44%-52%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
(4.00)
(3.00)
(2.00)
(1.00)
-
1.00
2.00
3.00
4.00
RMB/mBtu RMB/mBtu RMB/mBtu RMB/mBtu RMB/mBtu RMB/mBtu RMB/mBtu
Natural gas-Industrial User
LPG Fuel Oil Power Coal _6000 kcal
Diesel 60:40 FO LPG 60:40 FO LPG*.85
Apr16 vs. natural gas
11
EQUITIES OIL & GAS
24 May 2016
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Thomas C. Hilboldt and Tingting Si
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons
when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different
securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and
therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should
carefully read the entire research report and not infer its contents from the rating because research reports contain more
complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is
between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more
than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,
change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as
Overweight, the potential return, which equals the percentage difference between the current share price and the target price,
including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the
succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,
the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or
10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12
months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,
stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the
past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
EQUITIES OIL & GAS
24 May 2016
12
Rating distribution for long-term investment opportunities
As of 24 May 2016, the distribution of all ratings published is as follows:
Buy 45% (26% of these provided with Investment Banking Services)
Hold 40% (24% of these provided with Investment Banking Services)
Sell 15% (20% of these provided with Investment Banking Services)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to
current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current
model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis
for financial analysis” above.
Information regarding company share price performance and history of HSBC ratings and target prices in respect of long-term
investment opportunities for the companies that are the subject of this report is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price date Disclosure
CNOOC LTD. 0883.HK 9.05 23-May-2016 4, 5, 6, 7, 11
KUNLUN ENERGY 0135.HK 6.09 23-May-2016 6, 7, 11
PETROCHINA 0857.HK 5.20 23-May-2016 4, 5, 6, 11
PETROCHINA A 601857.SS 7.20 23-May-2016 4, 5, 6, 11
SINOPEC 0386.HK 5.10 23-May-2016 1, 2, 4, 5, 6, 7, 11
SINOPEC A 600028.SS 4.70 23-May-2016 1, 2, 4, 5, 6, 7, 11
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 30 April 2016 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 March 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 March 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 31 March 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt
(including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking, sales & trading, and principal trading revenues.
13
EQUITIES OIL & GAS
24 May 2016
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as
such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1 This report is dated as at 24 May 2016.
2 All market data included in this report are dated as at close 23 May 2016, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any
confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest
payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the
price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,
and/or (iii) measuring the performance of a financial instrument.
EQUITIES OIL & GAS
24 May 2016
14
Disclaimer
Legal entities as at 30 May 2014
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Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch;
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Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities
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Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul
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[512985]
Metals and Mining
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