Kunlun Energy's 2014 net profit disappoints at HK$5.6bn

Unexpectedly worse natural gas business performance cited.

It is expected that Kunlun’s 2014 results will have near-term negative implications on the stock.
According to a research note from Barclays, reported net profit of HK$5.6bn (diluted EPS of HK$0.69, down 18% y/y) was 7% below its estimate of HK$6bn and 3% below Bloomberg consensus of HK$5.8bn.

This is also the first year Kunlun has reported earnings decline since the company took its current form.

The earnings miss was due to worse than expected performances across its natural gas business lines and lower oil prices.

While China has taken steps to cut gas prices in a lower oil price environment, the extent of the recent cut is not enough, in Barclays' opinion, to spur demand and it expects Kunlun’s gas related businesses to face continued headwinds.

Here's more from Barclays:

E&P hit by Kazakhstan and lower oil prices: E&P segment PBT declined 34% y/y to HK$2.3bn with average oil realization down 13% y/y and overall production volume also down 3.3% y/y.

Kunlun’s associate in Kazakhstan incurred a one-time FX loss when Kazakhstan decided to devalue its currency (the Tenge) and is now required by the government to increase sales to the domestic market, which resulted in lower realizations. Unit EBITDA was down to US$19/bbl in 2014, 33% lower y/y.

Gas sales margin came under pressure: Kunlun’s gas sales segment sold 6.8bcm of gas in 2014, up 10% y/y, in line with China’s overall gas market growth.

But gas sales margin came under pressure after the NDRC’s gas price increases with blended unit EBIT margin down RMB0.08/m3 y/y to RMb0.21/m3.

Meanwhile, segment DD&A was up 33% y/y as the company put c200 more LNG filling stations into operation. Therefore, PBT was down 30% y/y to HK$1.4bn.

LNG processing plants utilization continued to drop: Kunlun’s LNG processing segment reported loss of HK$338mm. Kunlun now has 12 LNG processing plants in operation, with a daily capacity of 7.18mm m3.

In 2014, the total processing volume was c0.9bcm (down 2% y/y), implying a 38% utilization rate, compared with 48% (restated) in 2013. The segment was at loss (HK$100mm) at EBITDA level in 2H14, highlighting the sluggish onshore LNG market in China.

LNG terminal processing volume also down: Kunlun’s Dalian and Jiangsu terminals processed 5.1bcm of LNG, down 24% y/y as parent PetroChina diverted volume away from Kunlun’s terminals to its newly constructed Tangshan terminal. Segment PBT dropped 20% y/y to HK$805mm.

Robust pipeline transmission volume growth offset by lower tariff: Kunlun’s pipeline segment recorded 21% y/y volume growth, though it was partially due to a low base in 2013.

Despite robust volume growth, segment PBT consequently was up only 1% y/y following the NDRC’s decision to cut the tariff of the SJ-3 pipeline in 1H14.

On a blended base, the implied tariff was down RMB0.04/m3 y/y to RMB0.33/m3. We see continued risk of further tariff cuts as our analysis shows the IRR of SJ-2 may still be as high as 16%.