UPDATE 2-Price hike spurs China gas plays, lifts reform hopes

Tue Jul 2, 2013 4:47am EDT

* Price hike to boost income of gas importers like PetroChina, distributors

* Analysts expect more gas price increases over next two years

* PetroChina shares rack up best daily gain since May 2009 (Adds outlook of gas prices, share performance of related energy firms)

By Charlie Zhu

HONG KONG, July 2 (Reuters) - China's first natural gas price hike in three years will boost the revenues of importers led by PetroChina Co by billions of dollars and narrow mounting losses caused by selling the fuel at artificially low rates mandated by the government.

The long-awaited price hike is part of upward revisions through 2015 as the government liberalises its gas pricing regime to spur production and import of the cleaner-burning fuel, analysts say.

"Yes, absolutely," said Simon Powell, head of Asia Oil and Gas Research at CLSA in Hong Kong, when asked whether he expected China to further raise prices. "You are going to see another 20 percent increase on top of the 15 percent next year."

The latest increase of 0.26 yuan to 1.95 yuan (32 cents) per cubic metre is slightly more than the last revision of 0.23 yuan per cubic metre in 2010. The adjustment three years ago was a 25 percent increase.

While the hikes look impressive in percentage terms, the gas sold in China is cheap by international standards, and prices are still below the average import price of more than 3 yuan per cubic metre for gas originating from Central Asia.

Many analysts expect the size of future price increases to be bigger, with Goldman Sachs predicting annual gains of 0.42 yuan per cubic metre in 2014 and 2015.

The government's goal is to establish a market-oriented natural gas pricing mechanism that fully reflects demand and supply conditions, China's National Development and Reform Commission (NDRC) said after announcing the latest hike.

The Hong Kong-listed shares of PetroChina, which accounts for more than 70 percent of China's gas market, have soared after Beijing said late on Friday that non-residential users including industrial and commercial gas users will see a 15 percent jump in prices from July 10.

The stock rose more than 7 percent to HK$8.84 on Tuesday - its biggest gain since May 2009. The Hong Kong stock market was shut on Monday due to a public holiday.

Shares of mainland gas distributors such as ENN Energy Holdings Ltd also surged on hopes that increased imports and production will help boost sales volumes. Suppliers of gas in cities have been grappling with shortages as demand outstrips supply.

SURGING CONSUMPTION

Over the years, the Chinese government has encouraged the use of natural gas partly by keeping prices low.

It wants gas to account for 8 percent of the country's energy mix by 2015 versus 5 percent currently. That compares with the international average of 24 percent, according to the NDRC, China's top economic planner.

Additional price hikes are unlikely to erode industrial and commercial demand for gas in the world's second-biggest economy, analysts say.

Factories and businesses have very limited freedom to switch to coal - already 20 percent cheaper before the latest gas price hike - due to government pressure to use cleaner fuels, the analysts say.

Perennial bottlenecks in China's coal transport system also encourage users to lean towards natural gas, they say.

China purchased 42.5 billion cubic metres (bcm) of gas from overseas last year, up more than 30 percent compared with 2011 and a nearly 10-fold increase from 2007.

The gas - which delivered via pipelines from Central Asia and by ship in liquefied form from countries like Australia, Indonesia and Qatar - accounted for 27 percent of total consumption last year.

PetroChina made a loss of 41.9 billion yuan ($6.83 billion) from selling imported natural gas last year, due to government price controls put in place to tame inflation.

The country's largest energy company and other gas importers including Sinopec Corp have long lobbied for a gas price increase. Beijing has been concerned that raising prices too quickly would risk stoking inflation.

The government has not thrown caution to the wind, analysts say. Residential users, which account for an estimated one fifth of China's gas consumption, are exempted from the latest hike.

Investment banks including Morgan Stanley, BNP Paribas and HSBC have upgraded their ratings on PetroChina's shares in reaction to the price hike announced last week.

Some also revised up their earnings forecasts, with HSBC raising its 2013 earnings estimate for PetroChina by 17 percent and 2014 earnings by 8 percent.

GAS DISTRIBUTORS

Shares of companies distributing gas that they buy from importers also rose, even though the gas price hike may squeeze their margins in the short term, analysts say.

Some gas suppliers have already started price negotiations with their customers since the announcement of the hike, a top executive of a major Chinese distributor told Reuters. He declined to be identified as he was not authorised to speak to the media.

ENN Energy gained slightly to HK$41.50 on Tuesday, after hitting a session high of HK$44.55. The stock has surged more than 50 percent in the last 12 months, outperforming the market.

Other distributors like China Resources Gas Group Ltd and China Gas Holdings Ltd, once an acquisition target of a consortium between ENN and Sinopec, have risen around 50-100 percent in the period.

The gains make the sector a star performer on the Hong Kong bourse.

Shares of Chinese oil and gas services companies like Anton Oilfield Services Group and SPT Energy Group Inc also rose sharply on investor hopes that the price hike would lead to more spending on domestic gas exploration and production.

($1 = 6.1327 Chinese yuan) (Additional reporting by Vikram Subhedar and Clement Tan; Editing by Ryan Woo)

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