Negative consequences ahead for Kunlun following sluggish 1H14 results

Net profit slid down by 14%.

It is expected that Kunlun Energy’s 1H14 results will have near-term negative implications on the stock, with reported net profit of RMB3.2bn (diluted EPS of HK$0.39, down 14%) being 9% below Barclays' estimate of HK$3.5bn and 14% below Bloomberg consensus of HK$3.7bn.

According to a research note from Barclays, the earnings miss was due to worse than expected E&P segment performances and weakness across its natural gas business lines.

Meanwhile, group EBIT was 14% lower than Barclays' expectations. Further, with gas prices in China set to head higher, it is expected that Kunlun’s gas related businesses will face continued headwinds.

Here's more from Barclays:

Kazakhstan E&P assets hit by currency depreciation and local policy change: E&P segment PBT declined 44% y/y to HK$1.1bn with average oil realization down 10% y/y and overall production volume also down 5% y/y.

Kunlun’s associate in Kazakhstan incurred a one-time cHK$500mn FX loss when Kazakhstan decided to devalue its currency (the Tenge).

Meanwhile the unit is now required by the government to increase sales to the domestic market, which resulted in 26% lower realization y/y. Unit EBITDA was down to US$26/bbl in 1H14, compared with US$37-44/bbl in 2011-2013.

Robust pipeline transmission volume growth offset by higher DD&A cost: Kunlun’s pipeline segment recorded 22% y/y volume growth, though it was partially due to a low base in 2Q13.

While the transmission volume growth was in line with our estimates, we were surprised by the segment DD&A, which was up 20% y/y. Implied average unit tariff was also down RMB0.05/m3 to RMB0.32/m3. Segment PBT increased only 1% y/y.

LNG terminal processing volume also down: Kunlun’s Dalian and Jiangsu terminals processed 2.9bcm of LNG in 1H14, down 23% y/y as parent PetroChina diverted volume away from Kunlun’s terminals to its newly constructed Tangshan terminal. Segment PBT dropped 38% y/y to HK$265mm.

Gas sales volume flat while margin came under pressure: Kunlun’s gas sales segment sold 3.4bcm of gas in 1H14, largely flat y/y, compared with 9% growth of China’s overall gas market in the same period.

Meanwhile, segment DD&A was up 59% y/y as the company put 90 more LNG filling stations into operation.

Gas sales margin also came under pressure with blended unit EBIT margin down RMB0.04/m3 y/y to RMb0.25/cm. PBT was down 15% y/y to HK$1bn.

LNG processing plants utilization continued to drop: Kunlun’s LNG processing segment reported HK$19mm of PBT, down 49% y/y.

Kunlun now has 12 LNG processing plants in operation, with a daily capacity of 7.18mn cm. In 1H14, the total processing volume was c0.2bcm, implying a 17% utilization rate, compared with c18% in 2013.