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What are the implications for PetroChina(0857) selling its pipeline business?

Background

On 27 July 2020, PetroChina (0857) announced a transaction agreement with PipeChina for selling its pipeline business and assets. The appraised value of the target assets are approximately RMB268.7 billion. RMB149.5 billion will be satisfied through equity interest in PipeChina and the remainder will be satisfied in cash. As an investor, how would this transaction affecting the return of PetroChina?

Earnings for 2020 fiscal year

After the completion of this deal, RMB45.8 billion appreciation will be realized and recorded as non-recurring profit. As PetroChina was making RMB 16.2 billion loss in first quarter of 2020 fiscal year, this transaction may help the company to generate a positive earnings for the whole fiscal year.

Extraordinary Dividend

Part of the sale proceeds is expected to be used for dividend distribution to shareholders with reference to the company’s results of operations, capital expenditures and cash flows in 2020. Therefore, an one time extraordinary dividend are likely to be distributed to shareholders for 2020 fiscal year.

Future growth and return

Part of the sale proceeds will use for increasing the value of oil and gas industry chain. PetroChina stated that it will focus more on its upstream oil and gas exploration and development business, and actively promote the development of its downstream oil and gas distribution market.

As oil industry still under its downside cycle, there is a good chance for PetroChina to acquire high quality upstream asset with low price. By focusing on upstream which is much profitable, the return of PetroChina is expected to be boosted in future. In 2019, the return on net assets for PetroChina is 3.7%, this ratio should be able to increase in future.

New energy business development

PetroChina will use the sale proceeds to invest in new energy and new materials. This move will help the company to diversify existing business. It also transforming PetroChina into a sustainable energy model.

Capital structure

The sale proceeds may use for repayment of debt. As a result, liquidity ratio (0.71 in 2019), asset-liability ratio (47.15% in 2019) and EBITDA-debt ratio (0.74 in 2019) are expected to improve. By improving the capital structure, PetroChina will enjoy a better credit rating which eventually lower its overall borrowing cost.

Conclusion

By selling the pipeline business, investor of PetroChina may able to enjoy an one time extraordinary dividend in short run and having a more efficient and sustainable company in long run.

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