China Petroleum’s 1Q26 starts steadily, with natural gas and downstream offsetting weakness in upstream

Overview

This report provides Bernstein’s quick analysis of PetroChina Co Ltd’s 1Q26 results. The company posted a solid start to the quarter: net profit and EPS were broadly in line with market expectations, cash flow grew faster than profits, and natural gas, refining, marketing, and chemicals segments all performed strongly, while the balance sheet remained net cash. Weaknesses included lower-than-expected upstream earnings, driven by subdued realized oil prices.

Core views

The core view is that 1Q26 results are generally positive. Although upstream earnings were pressured by falling realized oil prices and slightly higher unit costs, robust growth in natural gas sales, reduced import gas costs, inventory gains in refining, and improved marketing margins collectively supported performance. Bernstein expects that if Brent crude remains around US$104/bbl in April—up from US$78/bbl in 1Q26—2Q26 earnings could improve significantly. Over the long term, PetroChina benefits from structural growth opportunities in natural gas, coupled with a P/E ratio below 9x and a dividend payout ratio of about 50%, making its risk-reward profile attractive.

Analysis framework

The report employs earnings breakdowns, segment EBIT comparisons, cash flow and capex analyses, peer valuations, and DCF modeling. Short-term judgments focus on deviations between actual 1Q26 results and both consensus estimates and Bernstein’s forecasts, while long-term valuations rely on projected free cash flows over the next decade discounted to present value.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  The report uses a 10-year free cash flow projection plus a terminal value for valuation, assuming US$80/bbl for 2026 and US$70/bbl for the long term, with H-share WACC at 7.2% and A-share WACC at 6.4%.

• Performance analysisSegment EBIT Analysis

  Segment EBIT breakdown

  The report compares E&P, Refining, Chemicals, Marketing, and Natural Gas segments’ EBIT, sales volumes, profit margins, and year-over-year changes to identify drivers and constraints of earnings.

• Relative valuationPeer Comparison

  Comparison with Asia-Pacific oil & gas peers

  The report benchmarks PetroChina against Sinopec, CNOOC, Woodside, Santos, Inpex, PTTEP, etc., evaluating metrics such as P/CF, FCF Yield, Payout Ratio, Dividend Yield, ROACE, and more.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 857.HK

  H-share primary listing, Outperform rating, target price HKD11.10

  Strengths

  Strong natural gas and downstream operations, growing free cash flow, net cash balance sheet, valuation below 9x P/E.

  Weaknesses

  Target price below current closing price HKD11.99, implying ~7% downside in the near term; weak upstream price realizations.

  Comparison

  Compared to other Asia-Pacific oil & gas peers, PetroChina offers a 2026E FCF Yield of around 10.1% and a 2026E Dividend Yield of about 6.4%.

  Risks

  Oil price declines, domestic production cuts, loss of refining subsidies, natural gas price controls, and underperformance in downstream gas operations.

• 601857.CH

  A-share listing of the same company, Market-Perform rating, target price CNY11.10

  Strengths

  Shares common growth drivers in natural gas, improved cash flow, and low leverage.

  Weaknesses

  A-share closing price CNY12.25 exceeds target price CNY11.10, with higher valuation multiples compared to H-shares.

  Comparison

  2026E P/E stands at 10.3x, higher than 857.HK’s 8.8x.

  Risks

  A/H valuation premium, oil price volatility, policy-driven pricing, and segmental profit fluctuations.

• Brent oil

  Key driver of earnings

  Strengths

  April Brent average around US$104/bbl; sustained high prices would significantly boost 2Q26 earnings.

  Weaknesses

  Price duration depends on evolving Middle East conflicts, introducing high uncertainty.

  Comparison

  1Q26 Brent averaged US$78/bbl; DCF assumes US$80/bbl in 2026 and US$70/bbl long-term.

  Risks

  Falling oil prices could suppress upstream profits and target prices.

Key data

• 1Q26 net profitRMB48.3bn, up 2% YoYBroadly matched consensus RMB0.27/share, but below Bernstein’s forecast of RMB0.29/share.
• 1Q26 EPSRMB0.26/shareUp 2% YoY.
• Operating cash flow (excluding working capital)RMB129bn, up 13% YoYGrowth outpaced net profit growth.
• Free cash flow (excluding working capital)RMB74bn, up 32% YoYIndicates improved cash generation capacity.
• Natural gas marketing EBITRMB18.9bn, up 40% YoYDriven by strong sales volumes and lower import gas costs.
• Total natural gas sales93.9bcm, up 6.9% YoYOf which domestic natural gas sales reached 73.8bcm, up 3.5% YoY.
• Refining EBITRMB7.2bn, up 58% YoYSupported by inventory gains, with refining margins rising to US$3.1/bbl.
• Upstream operating profitRMB41.0bn, down 12% YoYWeak upstream performance relative to expectations.
• Total oil & gas production470MMboe, up 0.7% YoYApproximately 25% of the full-year target of 1,853MMboe.
• Realized crude oil priceUS$64.1/bbl, down 8.5% YoYA key source of pressure on upstream earnings.
• Net cash positionRMB40bnNet debt ratio stood at -2% at the end of 1Q26.
• Target price857.HK: HKD11.1; 601857.CH: CNY11.1Report maintains Outperform outlook for 857.HK.

Impact & implications

The report suggests that PetroChina faces significant short-term volatility due to oil prices, geopolitical tensions, and upstream price realizations. If Brent crude remains elevated, 2Q26 earnings could markedly outpace 1Q26. Over the medium to long term, growth in the natural gas business, stable free cash flow, low leverage, and potential mid-to-high single-digit dividend yields support investment attractiveness.

Risks

• Decline in domestic oil production.
• Lower oil prices putting earnings under pressure due to high correlation between company profits and oil prices.
• Government fuel price subsidies potentially leading to larger-than-expected losses in the refining segment.
• Natural gas price controls possibly causing losses in the natural gas business.
• Downstream gas operations failing to control costs as expected.
• Uncertainty surrounding the duration of Middle East conflicts and oil price trajectories.

What to watch

• Whether Brent crude remains elevated in 2Q26 and how this impacts earnings.
• Changes in natural gas sales volumes, import gas costs, and LNG spot prices.
• Developments in upstream realized oil prices, realized gas prices, and unit extraction costs.
• Sustainability of refining inventory gains and whether refining margins decline.
• Progress in FY26 capital expenditure execution—report anticipates annual capex of RMB279bn.
• Dividend payout ratios, dividend yields, and potential for higher dividends or share buybacks.