China Oil & Gas Monthly：Oil demand rebounds on SPR fills;eyes on potential winter gas price hike

Deutsche Bank Markets Research Asia China Energy Oil & Gas Industry China Oil & Gas Monthly Date 5 October 2016 Periodical Oil demand rebounds on SPR fills; eyes on potential winter gas price hike Oil import drives oil demand up; PetroChina may raise gas price in winter ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Johnson Wan Research Analyst (+852 ) 2203 6163 johnson.wan@db.com Vitus Leung Research Analyst (+852 ) 2203 6158 vitus.leung@db.com Key Changes Company Target Price Rating 1033.HK 1.64 to 1.61(HKD) - Source: Deutsche Bank Top picks Sinopec (0386.HK),HKD5.73 Buy PetroChina (0857.HK),HKD5.19 Buy SPC - H (0338.HK),HKD3.95 Buy Source: Deutsche Bank Companies Featured Sinopec (0386.HK),HKD5.73 Buy PetroChina (0857.HK),HKD5.19 Buy CNOOC Ltd (0883.HK),HKD9.77 Hold SPC - H (0338.HK),HKD3.95 Buy Sinopec Kantons (0934.HK),HKD3.87 Buy Sinopec Oilfield Service (1033.HK),HKD1.58 Hold China Oilfield Services (2883.HK),HKD7.22 Hold Hilong Holding (1623.HK),HKD1.42 Hold SEG (2386.HK),HKD6.76 Buy COOEC (600583.SS),CNY6.84 Hold China BlueChemical (3983.HK),HKD1.45 Buy Sinofert (0297.HK),HKD1.01 Hold QSLI (000792.SZ),CNY18.66 Hold Source: Deutsche Bank Valuation and risks We value our China oil and gas companies with DCF and SOTP models. Risks: 1) oil and gas price volatility; 2) regulatory reform. Source: Datastream, Deutsche Bank Related recent research Date China O&G Engineering: One sector, two different outlooks Vitus Leung, Johnson Wan 23 Sep 16 Sinopec NDR: Strongest integrated player in China Johnson Wan, Vitus Leung 12 Sep 16 PetroChina NDR: Keeping up the pace of cost cuts with prudent cash use Johnson Wan, Vitus Leung 12 Sep 16 Source: Deutsche Bank Refining and chemicals segments continue to shine in the China O&G space. China refining margins continue to hover at USD8-10/bbl levels, while ethylene spreads have stayed healthy at USD700-800/t. In Aug, China oil demand rebounded strongly driven by oil imports for SPR filling, although oil consumption was lackluster. Despite the recent rise in oil prices, the recovery in OFS share price seems premature with semi-sub/jack-ups’ utilization rates hitting new lows in Aug. In addition, China OGP reported that PetroChina may lift the city-gate gas price by 20% in the winter to endure what could be a very cold winter ahead. Top picks: Sinopec, PetroChina, and SPC-H. E&P: strong oil demand rebound in Aug; tight winter gas supply On oil, crude oil demand rebounded, up 10% YoY (vs. -2% YoY in Jul) with strong imports (+24% YoY), offsetting the cut in domestic production (-9% YoY) on sluggish oil prices. For 8M16, China oil demand grew 6.3% YoY, while production fell 5.3% with oil imports growing 14% YoY. On gas, soft demand continued in Aug growing only 2% YoY, while 8M16 recorded growth of 11% YoY. Noticeably, gas pipeline import dipped 46% MoM in Aug. The NEA also published its 13th Five Year Plan with shale gas production targeted to reach 30bcm in 2020 and 80-100bcm by 2030 (4.5bcm in 2015). Refining: China GRM +20% MoM; premium to regional widens In Aug, China refining throughput was flat YoY, while major refined product demand fell 4% YoY driven by weak diesel and gasoline demand (-8%/-2% YoY). Net exports of major oil products slowed in Aug to only 45% YoY after increasing 215% for 7M16 due to maintenance of teapots and lower Singapore diesel and gasoline cracks in Aug. Conversely, China GRM rebounded to USD10.3/bbl in Aug, +20% MoM, while the premium to SG GRM widened to USD6.4/bbl. However, China GRM in Sep averaged USD9.0/bbl, -13% MoM (vs. SG GRM of USD6.6/bbl), while China CDU outages reached a three-month low of 38mmtpa in Sep (vs. 231mmtpa in Aug). Therefore, crude imports could continue to increase in Sep with refiners back online. Chemicals: product spreads shine on supply disruption with lower cost Chemicals spreads continue to improve – ethylene-naphtha spread rose 2.4% MoM in Aug due to regional capacity outages. Other major chemical spreads rebounded, ranging from 2% to 10%, led by propylene spread +10% MoM. However, China demand struggled in Aug with ethylene demand falling 7% YoY vs. +9% YoY in 8M16; nevertheless, ethylene net import surged 9% YoY, while production declined 8% YoY. We