Pipeline Spinoff In the Spinoff Pipeline?- Potential PetroChina(PTR) Pipeline Spinoff Has Analysts Abuzz

With oil prices remaining in the doldrums, what are oil & gas companies supposed to do to keep share prices up? Some companies have been pursuing asset sales while others are actually expanding into ‘hot’ shale geographies. Investors in PetroChina (PTR), China’s largest oil & gas company, aren’t focused on M&A to boost the struggling company though. Instead the buzz is all about a potential pipeline spinoff that equity analysts estimate could be worth about $85b. That would represent over 40% of the ADR’s market cap and the hope is that the company could use the proceeds to boost its dividends. PetroChina dominates the Chinese pipeline market with over 70% market share and operates over 48,000 miles of pipeline.

The pipeline pop isn’t a new phenomenon for the struggling PetroChina. When Sinopec sold off some of its pipeline assets last December at a P/E of 20, Sanford Bernstein’s Neil Beveridge noted that it could be a catalyst for PetroChina to take action on its pipelines. At the time, he estimated it could be two years, but the timing estimates seem to have changed:

“While timing is unclear, there is a sense that management is in favor of such a spinoff,” said Neil Beveridge, Bernstein’s head of Asia-Pacific oil and gas research, who has a buy rating on the stock and estimates the assets are worth 585 billion yuan ($85 billion). PetroChina’s preferred option is an initial public offering that would leave it with a controlling stake, he said.

Gordon Kwan, head of Asia-Pacific energy research at Nomura Holdings Inc., sees oil prices needing to rebound to $60 before any such move. Bernstein’s Beveridge sees it delayed until the pipeline segment accounts for less than half PetroChina’s revenue, which may not happen until next year.

Basically, no one really knows and the reason is because any decision is ultimately going to be made by the Chinese government. You can be sure that shareholder’s best interests is definitely not near the top of their list though. In fact, just a few years ago the government planned to strip the assets from PetroChina and its largest competitor in order to create a separate and monstrous state owned entity. At that point Bernstein’s Beveridge estimated the pipeline assets could be worth as much as $300b and an equity value of $147b so there is a history of high hopes and optimism with this situation.

The company is expected to report lousy earnings sometime in the next week so perhaps an update will be forthcoming. The celebrations might be a bit premature though.

Disclosure: Author holds no position in any stock mentioned.


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