Using the price-to-book methodology, Wood Mackenzie reckons China’s new state TSO will initially be worth just over $80 billion. However, the company is expected to seek a public listing after two years of operation to access funds for infrastructure investment. Such a listing would increase the company’s value significantly.
Bundling key pipelines
Beijing is enforcing the nationalization of all onshore oil and gas trunkline owned by PetroChina, Sinopec Group and CNOOC, as well as China-Myanmar import pipelines and suburban pipelines above 4 million tons per annum. All these assets will be operated by a state transmission system operator (TSO) to ensure fair access to take-away pipeline capacity for independent upstream producers, and gas importers.
PetroChina is the only one of China’s three big oil and gas companies with a substantial midstream business, accounting for 25 percent of operating earnings over the past five years. The company operates the largest pipeline network in the world, accounting for 63% of China’s total network
“Wresting these assets from PetroChina means it will partly lose its operational leverage and financial strength. Operating cashflow and income will be weaker, potentially putting the company’s future dividend at risk as PetroChina’s payout policy is based on earnings,” commented Wood Mackenzie senior analyst, Maxim Petrov.
Revaluating infrastructure
PetroChina is expected to be the main beneficiary from this reform, hoping to gain a higher valuation for its large midstream pipeline asses and a gas price that better reflects its cost of supply. “It takes time for a market-based price to emerge after third-party access, [but] this midstream reform is a step in the right direction,” commented Wood Mackenzie consultant Xueke Wang.
“Post-reform, we think the three national oil companies (NOCs) could collectively hold up to 70 percent ownership of the national pipeline company, with PetroChina taking pole position at just under 50 percent,” said Wood Mackenzie senior analyst, Maxim Petrov. The remaining share will be directly by the government or state-owned financial institutions.
After a public listing of the state oil and gas transmission system operator (TSO), PetroChina’s pipeline assets might well be revaluated at a higher multiple than currently, unlocking value for shareholders.
State TSO hoped to help meet demand growth
China’s current infrastructure is insufficient to meet energy demand growth. Pipelines are already running at maximum capacity during peak seasons, and gas demand is expected to rise 2.5 times from 2018 to 673 billion cubic metres (bcm), accounting for half of Asia’s gas consumption by 2040.
By 2025, the Chinese government seeks to double its pipeline infrastructure to over 240,000 km which means PetroChina’s midstream spending could hit up to $20 billion a year. On the positive side, “pipeline reform means the company will no longer be liable for this spend,” Petrov noted “which frees up funds for domestic investment and overseas expansion.”