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Bernstein Commodities & Power: Petrophilia - Can the Rise of China's Auto-
Crazed Petro-Consumers Offset Slower Industrial Growth?
Neil Beveridge, Ph.D. (Senior Analyst) +852-2918-5741
Oswald Clint, Ph.D., ACA (Senior Analyst) +44-207-170-5089
Bob Brackett, Ph.D. (Senior Analyst) +1-212-756-4656
Scott Gruber, CFA (Senior Analyst) +1-212-756-1935
Michael W. Parker (Senior Analyst) +852-2918-5747
Hugh Wynne (Senior Analyst) +1-212-823-2692

remain skeptical on the longevity of tight-oil production

growth), China's oil market continues to grow at a relentless
Petrophilia; Can the Rise of China's Auto-Crazed Petro- pace. This comes despite the economic slowdown, which is
Consumers Offset Slower Industrial Growth? clearly taking place as evidenced by recent GDP data. Last
By Neil Beveridge, PhD month China's oil imports hit an all time high of over
6mmbls/d for the first time with the country poised to
overtake the US as the world's largest crude oil importer
Oil markets remain strongly backwardated as the industry
over the coming two years. Looking at Exhibit 2, it is hard
digests two big uncertainties on the future-outlook for crude.
to see any discernable slowdown in imports, which have
Firstly, the glut of tight-oil out of the US could mean supply
grown three-fold over the past decade.
out-stripping demand, creating a world in which we are
'drowning in oil'. And secondly that we may be reaching not Exhibit 2
'peak oil' but 'peak oil demand' as a combination of Slowdown! What Slowdown? China Oil Imports Surge 20% y-o-y to
improved fuel efficiency, alternative vehicles (electric and reach 6mmbls/d
natural gas) and slower growth in China results in anemic
demand growth(Exhibit 1). Both of these concerns are
nicely captured by The Economist magazine covers of 1997 10000
'Drowning in Oil' and more recently, this year's cover, 8000
Imports kbd

'Yesterday's Fuel'. 6mmbls/d

20% y-o-y growth
Exhibit 1
Oil Markets Remain Strongly Backwardated On Supply and
Demand Side Uncertainties

















China United States of America

Source: IEA, Bernstein analysis

For now, China remains the engine for global oil demand.
Although at 10mmbls/d China only represents 11% of world
demand, it has accounted for 75% of incremental global
demand growth over the past 5 years (Exhibit 3). It goes
without saying that what happens to China demand over the
1997 2013 coming years remains critical to the outlook for oil.
Source: Economist (Permission Approved), Bernstein analysis

But while tight oil may have temporarily changed the

dynamics in North American oil markets (although we


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 2
Offset Slower Industrial Growth?

Exhibit 3
China Continues To Dominate Incremental Global Oil Demand Indeed, at a time of apparent economic weakness, China's
Growth.. apparent oil demand has averaged 10MMbls/d in 2013 (year-
to date) with crude imports reaching new highs. While it is
60% too early to say that there is a decoupling of demand with
GDP growth, it is clear from apparent oil demand is holding
China % share of global
incremenal oil demand

up well in spite of the slowing of GDP growth (Exhibit 5).
Exhibit 5
30% China's recent oil demand has been stronger than might have
been implied by the slowdown in GDP growth and industrial
20% production

10% 20%
R = 0.692

China apparent oil demand growth Y-o-Y

Source: BP statistical review, Bernstein analysis

10% 4Q2012

Oil demand resilient despite the slowdown. 2Q2011

Oil demand
But while China has been the engine of global oil demand 5%
growth 2Q2013
growth, China is slowing. As such, there have been strong
increased concerns on its ability to continue driving world 2Q2012
oil demand. While demand can be volatile month to month, 0%

what has been striking about the China oil market this year is
its resilience. Growth this year has remained relatively
strong at over 5.4% y-o-y despite the slowdown in GDP -5%

growth and industrial production (Exhibit 4). 6% 7% 8% 9% 10%

China real GDP growth Y-o-Y
Exhibit 4
Despite the slow-down in industrial output growth, apparent oil
demand has been resilient Source: China NBS, Bernstein analysis

25% 20%

The Rise of the Consumer and Shift towards Gasoline


Digging a little deeper into the data, there is a clear shift in
15% demand taking place towards lighter distillates. Diesel
dominates the refined products market in China accounting
Apparent Oil Demand Growth

for 55% of demand, with gasoline only 26% of light product

Industrial Output Growth

demand. Historically diesel demand has been linked to
5% industrial activity with spikes in demand during periods of
rapid GDP growth, such as during the last fiscal stimulus
11% (2009/10). More recently however, we have seen gasoline
demand growth accelerate to 15% y-o-y while diesel demand
-5% has slumped to flat or even negative growth rates (Exhibit
Oil demand has been 8% 6).
resilient despite
-10% the slow-down in
industrial output growth

-15% 5%















Apparent Oil Demand Growth Industrial Output Growth

Source: China NBS, Bernstein analysis


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 3
Offset Slower Industrial Growth?

Exhibit 6 Exhibit 8
From Diesel to Gasoline; Gasoline Growth is now firmly driving Car sales continue to grow strongly at double digit rates despite a
Chinese oil demand as mobility takes over from industry slow-down in industrial output growth
25% 80% 21%
Apparent Oil Demand Growth

20% 19%

Passenger Car Sales Growth


Industrial Output Growth

15% 17%
20% 13%
0% 0%
-5% -20%
The growth in gasoline consumption 7%
-10% has outpaced diesel demand growth.
-40% 5%



































Apparent Gasoline Demand Growth Apparent Diesel Demand Growth Passenger Car Sales Growth Industrial Output Growth

Source: Company, China NDRC, Bernstein analysis and estimates Source: China NBS, Bloomberg, Bernstein analysis

This marks a fundamental shift in the oil market whereby Availability of credit for car purchases and increase in per
consumption growth linked to demand for mobility is capita GDP to over US$5000/per person now makes the
becoming more important than industrial demand. This is motor vehicle affordable to the masses for the first time
pushing demand away from diesel and towards gasoline. explaining the high beta of car sales to GDP. Between now
Transport demand (road and air) for oil now accounts for and the end of the decade we estimate the vehicle parc in
almost 70% of light product demand (65% of the barrel) China will double from over 106 million units last year to
(Exhibit 7) compared with 50% a decade ago making 220million units (Exhibit 9).
transport growth more important than industrial growth.
Exhibit 9
Exhibit 7 Just Can't Get Enough! In the past 10 years, China car sales grew
Transport demand increasingly dominates light product demand at 18% CAGR to 106 million units (79 vehicles per 1,000 people) by
growth in China the end of 2012. We expect the number of cars to more than
double over the next 8 years to 224 million units in 2020 (159
100% vehicles per 1,000 people).
Oil demand by sector

Vehicle amount, Million Units













Primary Industry Power Transport Other

Source: China NBS, Bernstein analysis 50


Cars and Consumers Move to the Driving Seat

Underpinning this shift in oil demand towards transportation
is the rapid growth in demand for automobiles. Over the past Passenger Vehicle Trucks
twelve months, China has continued to see strong growth in
Source: China NBS, Bloomberg, Bernstein analysis
auto sales in contrast to the decline in industrial production
growth (Exhibit 8). We expect vehicle sales of 20million China's current vehicle penetration remains low at 79
units this year (1.5mllion vehicles per month) which is vehicles per 1000 persons. Even by 2020, China's total
equivalent to adding the entire vehicle fleet of the UK vehicle fleet will only be 159 vehicles per 1000 persons
every two years. compared with 800 cars per 1000 persons in the US (Exhibit
10) suggesting that growth has a long way to go.


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 4
Offset Slower Industrial Growth?

Exhibit 10 Exhibit 11
Much More To Go..Vehicle ownership per 1,000 people in China It's Not Just A Tier 1 Story..New car registrations are particularly
is 79, still less than one tenth of the level in US strong in the middle income provinces as the middle class takes
to the road
900 Shandong
Vehicle owernship per 1000 people

800 Hebei
700 Yunnan
New car registrations
Beijing are particularly strong
Hubei in the middle
600 Heilongjiang income provinces
500 Xinjiang
400 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000
New registrations by province
Vehicle owernship Source: China NBS, Bernstein analysis
200 per 1000 people
in China reached
79 in 2012
100 Traffic data from major expressways in eastern China points
to a clear growth in daily traffic volume, which suggests new
China US
cars are indeed making their way on to China's rapidly
expanding road network (Exhibit 12).
Source: Dargay, Gately, Sommer, Vehicle Ownership and Income Growth, Worldwide: 1996-
2030, China NBS, Bernstein estimates Exhibit 12
Yes The Cars Are Being DrivenHangzhou-Ningbo highway,
one of the busiest highways in China, continues to experience
The Car Pool May be growing But Are They Being Driven? sharp growth in average daily traffic volume YTD

Although car sales may be growing, one of the questions we 50 25%

HZ-NB Average daily traffic volume

Hangzhou-Ningbo Traffic Growth

48 20%
are often asked is; are the cars purchased actually being 46 15%
driven? Anyone who has been to China recently will be 44

aware that in major cities such as Beijing where penetration 40

rates are highest, traffic is highly congested and restrictions 38
are in place on new vehicle purchases. For new buyers it is 34 -10%

quite literally luck of the draw as to whether they can join 32 -15%
30 -20%
the new vehicle owning class. But while new car sales may
















be slowing in 'Tier One' cities of Beijing and Shanghai, car
sales are growing most strongly in middle income provinces Hangzhou-Ningbo Highway Hangzhou-Ningbo Traff ic Y-o-Y Growth

such as Shandong, Jiangsu and Sichuan where the car is now Source: Companies, Bernstein analysis
affordable to the middle class for the first time (Exhibit 11).

SUV Mania Counts for More than Fuel Efficiency or Electric Cars
While the number of vehicles is growing quickly, there
remains a risk is that improvements in fuel standards and
alternative vehicles such as electric, CNG or LNG will offset
the annual 10% to 15% growth in vehicle sales. We think
these risks are small. While the government is targeting a
50% improvement in fuel consumption per vehicle, the shift
towards larger, heavier SUVs (which is the fastest growing
sub-segment of the car market) will mean that fuel efficiency
of the fleet will only improve by 9% through to 2020. Given
their popularity (owning to a high riding position and more
aggressive styling), the shift to SUVs is an unstoppable trend


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 5
Offset Slower Industrial Growth?

in our view. In contrast, penetration of electric vehicles will indicator for oil demand growth. While some worry about
remain much lower due to limitations of battery technology alternative vehicles, this remains in the distant horizon with
and infrastructure. We believe that overall SUV penetration SUVs a more important near term trend. While oil futures
will reach 25% of the sales volume in 2020 compared to 5% may be pointing to oil deflation, it seems hard to reconcile
for electric vehicles (Exhibit 13). Bernstein Oil and Autos: with China's 'Petrophilia' or put more bluntly, insatiable
SUV Mania and Pro-SUV CAFC Rules Mean China's appetite for crude oil. Instead, we believe oil prices will
Gasoline Demand Will Be Stronger for Longer. While we continue to rise (with a target of Brent at US$120/bbl) by
are more optimistic on natural gas and LNG vehicles, we 2016, which in our view suggests that global oil equities
only see them accounting for 8% of the truck fleet by 2020, (trading at decade low valuation multiples) are too 'cheap'.
which is not big enough to offset the enormous demand For a list of our top picks in global oil and gas please see the
growth from newly produced gasoline and diesel burning company summary table at the end of this report.
cars and trucks which are streaming onto China's roads every

Exhibit 13
SUV Mania Trumps Alternative Vehicles; We expect that SUV sales
volumes will grow at 10.9% CAGR from 2012 to 2020 and SUV will
remain dominant in terms of sales volume in China by 2020


Sales Volume, '000 Units






SUV Eelectric vehicle

Source: IHS, Bernstein analysis and estimates

Conclusion Oil and the Petro-Consumer Will Keep China's Oil

demand Growth on the Rise
While investors are (rightfully) concerned as to what impact
the industrial slowdown in China will have on oil demand,
we believe that oil may be less impacted than some believe
and China's oil growth will continue to be robust with
perhaps a higher beta to GDP than in the past. Oil is now
much less dependent on industrial demand than it used to be.
Demand for mobility is the new driver of oil and China
remains in the sweet spot. In our view, vehicle sales are
likely to continue growing at rates of greater than 10% until
the end of the decade. Oil demand is therefore tied more to
the outlook for the consumer (which we are positive on) than
to industrial growth (which we are less positive on). As
China moves towards 'a consumption led economy, car sales
rather than PMI may become a more meaningful lead


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 6
Offset Slower Industrial Growth?

U.S. Utilities
This Weeks Reports U.S. Utilities: Conference Call Transcript -- EPA Senior
(available on FirstCall/ Counsel Joe Goffman on How EPA Will Regulate CO2
(2013/8/13) In a major policy address on climate change
delivered at Georgetown University on June 25, President
Asia-Pacific Oil & Gas Obama set out a schedule for EPA to regulate CO2 emissions
Australian E&Ps: The Upside to E&Ps from the Downside from new and existing fossil fuel power plants before he leaves
in the Aussie; Raising Our Price Targets on Weaker FX office. To better understand how EPA will develop and
Outlook (2013/8/13) Year to date, Australian E&Ps have implement these regulations, we interviewed Joe Goffman,
outperformed the ASX and significantly outperformed emerging Senior Counsel to the Assistant Administrator of the EPA's
market peers in the region. A weakening Australian dollar, with Office of Air and Radiation. This note presents the transcript of
AUD/USD dropping from 1.0 to 0.9, has been beneficial for the that interview, and summarizes the key conclusions.
sector. We increase our target prices for Australian E&P stocks
to align with the new AUD/USD outlook at 0.9. We raise our Changes to Ratings / Target Prices/ Earnings Estimates
price target for OSH to A$9.5, for STO to A$13.2, but keep Please refer to Exhibit 14
WPL's target price unchanged at A$42.5 to reflect Leviathan
execution risks. While the next phase of growth for Australian
E&Ps is unclear given competition from N.A. LNG, we are
optimistic that PNG LNG Train 3 will reach FID by 2014 and The Week Ahead
that WPL will push forward Browse FLNG. We rate OSH and
WPL outperform. 8/16/2013: Santos 1H earnings results
8/19/2013: Longyuan, Yanzhou and CR Power 1H earnings
North American E&Ps:
8/20/2013: Cairn, China Coal Energy, Huaneng Renewables,
Best of Bernstein: Talisman Energy - Recovering Focus and Oil Search and COSL 1H earnings results
Embracing Change (2013/8/15) With TLM's stock still
struggling over the past year, we examine past 8/21/2013: CNOOC, Woodside, Hong Kong and China Gas 1H
underperformance and discuss upcoming changes that could earnings results
mean better days ahead. Firstly, we commend TLM's plan to 8/22/2013: PetroChina, Premier 1H earnings results; Duke
divest or JV non-core assets to regain focus in their portfolio. Energy (DUK) Site Visit
We note that TLM has decent assets within their core portfolio,
including US shale, Colombia, and Southeast Asia. We believe 8/23/2013: Datang Power, Kunlun, Shenhua 1H earnings results
TLM's Kurdistan position is underappreciated; following recent
commentary on the Kurdamir-3 we see $1B+ of potential value Commodity Price Information
upside. Finally, we believe the company could be a target for Source: Bloomberg, Bernstein estimates
shareholder activism and also as a potential takeout target. We
continue to rate TLM outperform and rank the stock as our top 8/15/2013 Spot Price Last Week Last Month
pick. Natural Gas 3.36 3.27 3.67
WTI Crude Oil 106.85 103.40 106.32

U.S. Oil Services: SCB Estimates 2012A 2013E 2014E

Natural Gas 2.75 4.00 4.00
U.S. Oil Services: 3 Valuation Analyses Which Suggest That
WTI Crude Oil 94.00 96.00 101.00
Halliburton Remains Undervalued (2013/8/14) We believe
HAL's stock remains undervalued and fair value is above the
high end of the dutch auction range of $42.5 - 48.5. We base
this on three valuation analyses. 1) HAL's P/2014E EPS Risks
multiple is 14% below the S&P, or 17% assuming full recap.
This compares to a 10% premium since 1995. 2) A DCF points Risks to energy and commodity stocks include economic
to $50 fair value, assuming 5% top line growth for the next conditions and commodity price swings. If the global, US or
decade. 3) Valuation gap with SLB should shrink as ROE is Chinese economies turn down significantly, global demand
similar and growth rates should converge in 2014. We also growth for commodities could decelerate, putting pressure on
identify numerous growth drivers which support upside for the prices and thus on the cash flow of producers. Economic swings
stock. We recommend shareholders retain their HAL stock, let also affect refiners and utilities. Utility stocks could be further
others tender and benefit from the EPS accretion. HAL remains impacted by swings in demand for electric power. If demand
one of our top picks. Reiterate outperform. drops, utilities could suffer.


Exhibit 14 Company Summaries Valuation Based on Bernstein Estimates
EPS P/E Stock Price Change

Price as of Aug Target Last Last Last 12

Ticker Rating Curr. 15, 2013 Price Upside 2012A 2013E 2014E 2012A 2013E 2014E Week Month Months
European Integrated Oils
BP M USD 41.28 45.00 9% 5.56 4.93 5.60 7.4 8.4 7.4 -1% -2% -2%
E O USD 46.04 54.00 17% 5.06 3.85 4.73 9.1 12.0 9.7 2% 13% 5%
TOT O USD 53.74 67.00 25% 6.06 7.17 7.88 8.9 7.5 6.8 1% 9% 9%
RDSA.LN M GBP 2,073 2,200 6% 254 262 291 9.7 7.9 7.1 -3% -5% -9%
North American E&Ps
APA O USD 83.18 103.00 24% 9.48 9.82 10.93 8.8 8.5 7.6 2% 4% -6%
APC O USD 90.48 100.00 11% 3.52 4.57 5.35 25.7 19.8 16.9 0% 2% 30%
CHK M USD 25.01 23.00 -8% 0.61 1.56 1.82 41.0 16.0 13.7 0% 17% 23%
COG M USD 75.70 84.00 11% 0.66 1.60 2.67 114.7 47.3 28.4 -2% 6% 74%
DVN M USD 58.67 66.00 12% 3.26 3.84 5.47 18.0 15.3 10.7 4% 6% -3%
ECA M USD 17.44 18.00 3% 1.35 0.90 1.04 12.9 19.4 16.8 0% 2% -23%
EOG O USD 158.58 165.00 4% 5.67 7.15 9.25 28.0 22.2 17.1 4% 11% 45%
NBL M USD 63.98 64.50 1% 2.47 3.49 4.50 25.9 18.3 14.2 -1% 0% 42%
RRC O USD 79.93 90.00 13% 0.92 1.64 2.39 86.9 48.7 33.4 -1% 1% 21%
SWN O USD 37.71 44.00 17% 1.39 1.96 2.11 27.1 19.2 17.9 -6% -3% 15%
TLM O USD 11.15 15.00 35% 0.09 0.21 0.39 123.9 53.1 28.6 -1% -4% -16%
BHI O USD 47.92 62.00 29% 3.27 2.88 4.15 14.7 16.6 11.5 -1% -2% -1%
HAL O USD 46.14 54.00 17% 3.01 3.09 3.90 15.3 14.9 11.8 -1% 5% 32%
SLB O USD 81.23 97.00 19% 4.17 4.77 5.58 19.5 17.0 14.6 -3% 7% 9%
WFT M USD 14.54 15.00 3% 0.44 0.70 1.18 33.0 20.8 12.3 2% 3% 11%
CAM O USD 57.97 74.00 28% 3.13 3.52 4.82 18.5 16.5 12.0 -4% -11% 12%
FTI M USD 53.93 57.00 6% 1.90 2.10 2.94 28.4 25.7 18.3 -2% -7% 13%
NOV M USD 72.78 75.00 3% 5.91 5.33 6.24 12.3 13.7 11.7 2% 0% -5%
DO M USD 68.88 75.00 9% 5.06 4.74 6.67 13.6 14.5 10.3 0% -2% 1%
ESV O USD 59.05 73.00 24% 5.03 6.60 7.64 11.7 8.9 7.7 1% 0% 6%
NE O USD 39.36 52.00 32% 2.01 2.98 4.80 19.6 13.2 8.2 0% 0% 3%
RDC M USD 36.02 37.00 3% 1.75 2.06 3.83 20.6 17.5 9.4 2% 3% 1%
RIG O USD 48.58 61.00 26% 3.98 4.52 6.42 12.2 10.7 7.6 1% -1% 0%
SDRL M USD 43.97 39.00 -11% 2.62 2.71 3.33 16.8 16.2 13.2 2% 6% 9%
HP M USD 67.87 69.00 2% 5.18 5.45 5.31 13.1 12.5 12.8 5% 5% 39%
NBR O USD 15.65 19.00 21% 1.34 0.76 1.06 11.7 20.6 14.8 -1% 4% 0%
PTEN M USD 19.97 21.00 5% 1.88 1.33 1.00 10.6 15.0 20.0 -1% -2% 19%
European E&Ps
BG/.LN O GBP 1,193 1800 51% 81.84 80.84 104.66 14.58 14.76 11.40 -99% -99% -99%
STO M USD 21.50 23.00 7% 3.00 2.70 2.87 7.2 8.0 7.5 1% 2% -15%
CNE.LN M GBP 2.75 3.30 20% 7.00 -9.00 -10.00 0.4 -0.3 -0.3 1% 4% -10%
GALP.PL O EUR 12.52 19.00 52% 0.41 0.47 0.59 30.5 26.6 21.2 2% 7% 8%
PMO.LN O GBP 356 570.00 60% 28.00 40.00 51.00 12.7 8.9 7.0 -3% 4% -9%
TLW.LN O GBP 1,041 1740.00 67% 43.00 48.00 48.00 24.2 21.7 21.7 -2% -4% -24%
REP.SM O EUR 18.06 20.00 11% 1.80 1.84 2.10 10.0 9.8 8.6 -1% 7% 25%
Russian Oil & Gas
LKOD.LI M USD 57.65 57.00 -1% 14.47 13.05 14.00 3.98 4.42 4.12 -3% 0% -2%
NVTK.LI O USD 111.10 137.00 23% 7.38 9.80 12.52 15.1 11.3 8.9 -5% -7% -8%
OGZD.LI O USD 6.88 13.00 89% 3.22 2.86 3.17 2.1 2.4 2.2 -12% 0% -29%
ROSN.LI M USD 6.92 9.90 43% 1.30 0.97 1.13 5.3 7.1 6.1 -3% -2% 9%
Asia-Pacific Oil & Gas
2883.HK M HKD 17.44 18.13 4% 1.25 1.45 1.64 9.3 7.7 7.7 -4% 15% 42%
883.HK O HKD 13.88 21.70 56% 1.75 1.81 2.04 7.9 7.7 6.8 -2% 6% -13%
857.HK O HKD 8.82 12.00 36% 0.77 0.91 1.05 11.5 9.7 8.4 -4% -3% -10%
386.HK M HKD 5.59 7.70 38% 0.86 0.80 0.88 6.5 7.0 6.4 -4% 3% -2%
135.HK O HKD 11.80 17.00 44% 0.83 0.93 1.11 14.2 12.7 10.6 3% -8% -5%
1605.JP M JPY 414,000 500,000 21% 46,501 47,096 48,849 8.9 8.8 8.5 -7% -9% -12%
OSH.AU O AUD 8.01 9.50 19% 0.11 0.14 0.29 72.8 57.2 27.6 -1% -1% 13%
STO.AU M AUD 13.85 13.20 -5% 0.63 0.60 0.71 22.0 23.1 19.5 1% -1% 23%
WPL.AU O AUD 38.26 42.50 11% 2.44 2.68 2.99 15.7 14.3 12.8 0% 4% 11%
ONGC.IN M INR 273.10 340.00 24% 32.89 28.60 32.60 8.3 9.5 8.4 -3% -8% -2%
RIL.IN O INR 865.65 960.00 11% 64.80 69.40 75.10 13.4 12.5 11.5 2% 1% 11%
PTTEP.TB M THB 155.50 177.00 14% 13.44 15.71 15.94 11.6 9.9 9.8 -2% -5% 2%
U.S. Utilities
AEP M USD 45.52 50.00 10% 3.09 3.15 3.33 14.7 14.5 13.7 -2% 0% 5%
D M USD 60.29 48.00 -20% 3.05 3.36 3.36 19.8 17.9 17.9 1% 5% 12%
DUK M USD 71.23 75.00 5% 4.32 4.21 4.61 16.5 16.9 15.5 0% 4% 5%
EIX O USD 49.37 55.00 11% 3.92 3.25 3.38 12.6 15.2 14.6 -1% 3% 10%
EXC M USD 31.35 32.00 2% 2.85 2.44 2.23 11.0 12.8 14.1 2% 3% -19%
FE M USD 38.41 45.00 17% 3.34 3.15 3.25 11.5 12.2 11.8 0% 4% -16%
NEE M USD 86.63 84.00 -3% 4.57 4.96 5.28 19.0 17.5 16.4 -2% 6% 25%
PCG O USD 45.39 53.00 17% 3.22 2.66 3.14 14.1 17.1 14.5 -2% 1% 0%
Asian Coal, Power & Renewables
902.HK* M HKD 8.08 9.00 11% 0.42 0.90 0.85 15.6 7.3 7.7 -3% 4% 56%
836.HK M HKD 17.16 20.00 17% 1.58 2.07 1.92 10.9 8.3 8.9 -4% -15% 10%
991.HK* M HKD 3.34 3.00 -10% 0.30 0.34 0.30 9.1 8.0 9.1 -6% 2% 24%
3.HK U HKD 20.05 14.00 -30% 0.66 0.73 0.78 30.4 27.5 25.7 -1% 3% 23%
2688.HK* U HKD 39.95 26.00 -35% 1.37 1.54 1.64 23.7 21.1 19.8 -6% -6% 39%
916.HK* O HKD 8.14 11.00 35% 0.35 0.49 0.67 18.9 13.5 9.9 -2% -1% 58%
1798.HK* M HKD 1.80 1.60 -11% 0.02 0.04 0.08 73.2 36.6 18.3 -1% 14% na
958.HK* O HKD 2.61 4.00 53% 0.07 0.14 0.20 30.3 15.2 10.6 -7% -5% na
2.HK U HKD 64.25 50.00 -22% 3.45 4.00 4.05 18.6 16.1 15.9 0% 2% -5%
6.HK M HKD 60.00 60.00 0% 4.56 4.68 4.78 13.2 12.8 12.6 -2% 1% 14%
1088.HK* U HKD 22.00 15.00 -32% 2.46 1.82 1.51 8.9 12.1 14.6 -2% 9% -27%
1898.HK* U HKD 4.18 3.00 -28% 0.68 0.39 0.17 6.1 10.7 24.6 0% 4% -46%
1171.HK* U HKD 5.59 4.00 -28% 0.73 0.41 0.24 7.7 13.6 23.3 5% 2% -58%
3800.HK O HKD 2.01 4.00 99% -0.23 -0.05 0.13 -8.7 -40.2 15.5 0% 18% 50%
Relevant Indices
SPX 1,697.48 103.12 109.85 121.99 16.5 15.5 13.9 -1% 3% 21%
MSDLE15 1,585.08 94.20 95.30 106.85 16.8 16.6 14.8 1% 7% 21%
MXAPJ 438.97 32.75 36.14 40.62 13.4 12.1 10.8 0% 2% 2%
MXEF 937.86 81.68 89.98 100.67 11.5 10.4 9.3 -2% 2% -4%

* Highlighting denotes this week's changes to ratings, target prices and/or earnings forecasts. EPS for companies with an asterisk are reported in RMB while share
prices are reported in HKD. USD and European prices as of August 14, 2013.
BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 8
Offset Slower Industrial Growth?

Source: Capital IQ and Bernstein estimates

Valuation Methodology
We value Asia-Pacific large cap oil and gas companies (PetroChina, Sinopec, CNOOC, PTTEP and ONGC) by identifying
the forward price to book multiples they should trade at based on returns on equity, long term earnings growth expectations,
dividend payout ratio and cost of equity. Our starting point is that Fwd P/B = (ROE x PO) / (Ke g), which ROE is our
estimates of ROE for 2014, PO is the dividend payout ratio, Ke is the cost of equity, and g is the long term growth rates. For
Australian E&Ps (Santos, Oil Search and Woodside), we believe an NAV approach is appropriate given a significant
portion of their values are attached to future LNG projects. In calculating the NAV, we have assumed a long term oil price of
$100 (real). We value Reliance and COSL using a sum of the parts methodology.
Our target prices for the European Integrated Oils are calculated by applying our estimates for 2013 cashflow per share
(CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated through the relationship, and
historically strong correlation, between 12 month forward P/CF multiples and Return on Average Capital Employed
(ROACE) within the Integrated Oils group. Our calculation utilizes this relationship and an estimated long term, through the
cycle ROACE to generate the target P/CF multiple. The price calculations for the Integrateds are summarized below. We use
$110/bbl Brent and $4.25/mcf for US gas in 2013. We use DCF valuations to determine our price targets for the Russian
Energy stocks incorporating WACC rates ranging from 12-15% and terminal growth rates ranging from 0.5% to 3%. For
BG, Galp & Repsol and the European E&Ps we use an NAV approach. In calculating the NAV, we have assumed a long
term oil price of $90.
Our target price methodology for the Oil Services (SLB, HAL, BHI & WFT) is based upon P/E multiples applied to our
2014 EPS estimates. Our P/E multiples are determined by the relationship between relative P/E multiples and returns relative
to the market for each Service stock. We then adjust the multiples for forecast earnings revisions. We also apply a 25%
discount to Weatherford's target price due to the outstanding tax accounting and legal issues.
For the Equipment providers (NOV & CAM), our P/E multiples are derived from our crude price forecasts and individual
company backlog forecasts, and their historical influence on each stock's multiple. We apply these multiples to our 2014 EPS
estimates to arrive at our target prices for each Equipment stock. Our target price for FMC Technologies (FTI) is based upon
a P/E multiple applied to our 2014 EPS estimate, but the P/E multiple is derived from a high-end sector multiple of 18x
applied to our 2015 EPS forecast, discounted back by one year.
Our valuation methodology for the Offshore Drillers combines an EV/EBITDA based approach and Net Asset Value. Our
EV/EBITDA based target prices utilize 2015 forecasted EBITDA, as long duration contracts cause the group to trade on
forecasted cash generation further into the future. We apply a modeled group EV/EBITDA multiple, utilizing the year over
year change in crude prices and the ratio of newbuild orders to working rigs. Next, we adjust the company specific multiple
based upon fleet complexity. We tweak the multiple upward for Diamond (dividend), Ensco (operational quality), Seadrill
(dividend), and Transocean (dividend). Our NAV incorporates both recent rig orders and transactions, and utilizes our rig
complexity index to benchmark the global fleet. For Seadrill, we apply a 3x NAV multiple given fleet quality and growth, as
justified by DCF. Given robust contract backlogs and rising rig rates, we also add the discounted free cash flow that each
Driller will generate in 2013 and 2014 to account for the potential growth in assets. Finally, we apply a 2:1 weighting to our
EV/EBITDA and NAV target prices, respectively, to calculate our published target price for each Driller. Our Land Driller
target price methodology combines two approaches. First, we calculate an appropriate EV/EBITDA multiple based upon a
prediction model incorporating the year-over-year change in commodity prices, weighted by the US active rig count split and
the Land Driller reinvestment rate. The model inputs are leading indicators for changes in land rig supply and demand.
Second, we calculate the NAV including asset additions. For H&P only, we give a 10% premium on NAV as cash generation
appears more certain. Finally, we take a simple average of the two methodologies.
We value companies within our Asian Utilities coverage based on a combination of DCF, price-to-forward year earnings
multiple and dividend yield. Our valuation for Huaneng reflects an accelerated earning growth rate in 2013 and beyond based
on the company's exposure to declining coal pricing on the benefit of a focused capital spending program. Our valuation for
HNP (the NYSE-listed ADR) multiplies of Hong Kong valuation by 40 (the number of H-Shares each ADR represents) and
divides by the current HKD exchange rate. We assign CR Power a higher multiple due to the quality of its assets and
operations and its relatively low level of debt. Our concerns around Datang's non-power businesses mean that we assign the
company lower earnings multiple due to slower long-term growth. Our valuation for Hong Kong and China Gas is based on
our Sum of the Parts method. Our valuation for ENN is based on a P/FE multiple and our 2013 EPS estimate. We are
assigning ENN a discount to its historical multiple given uncertainties about what the company might do next. Our valuation
for CLP is driven primarily from a SoTP analysis of the companies' different segments. We believe that it is dividend yield


BERNSTEIN Commodities & Power: Petrophilia - Can the Rise of China's Auto-Crazed Petro-Consumers 9
Offset Slower Industrial Growth?

that primarily drives the stock price. Our valuation for Power Assets Holdings is derived by applying a forward P/E multiple
to our 2014 EPS estimate. Our valuation for NTPC is based on a forward P/E and a DCF valuation. Our valuation of Reliance
Power is based on a combination of liquidation value, replacement cost and Price/Book. We value China Longyuan, Datang
Renewable and Huaneng Renewables based on a forward P/E ratio.
For the US Utilities, our target prices reflect the results of three alternative valuation methodologies: (i) a multiple-based
valuation calculated by applying the median valuation multiples of a group of comparable companies to our estimates of a
utilitys future earnings, dividends and EBITDA; (ii) a discounted cash flow model over the forecast period of 2013-2016,
and a terminal value in 2017 discounted back to present value at the weighted average cost of capital; and (iii) a discounted
dividend model over the forecast period of 2013-2016, and a terminal value in 2017, discounted back to present value at the
cost of equity.
Our valuation framework for our coverage of North American E&P oil & gas stocks is based on the correlation of P/CF
multiple and the recycle ratio (cash flow per barrel divided by F&D costs). The recycle ratio-implied target multiples are
supplemented by company-specific catalysts, which are valued independently under a full-life cycle NPV methodology and
applied in the form of incremental (positive or negative) change. We adjust our target multiples to include the effects of
growth, capitalization, capital efficiency, and risk.


References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong)
Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a
licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the
U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian
companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside
of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless
otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 08/09/2013, Bernstein's ratings were distributed as follows: Outperform - 39.2% (0.9% banking clients) ; Market-Perform - 48.2%
(0.4% banking clients); Underperform - 12.6% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in
parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the
last twelve (12) months.
Neil Beveridge maintains a long position in BP PLC (BP).
Hugh Wynne maintains a long position in Duke Energy Corp. (DUK).
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of
the following companies BG/.LN / BG Group PLC, DO / Diamond Offshore Drilling Inc, TLW.LN / Tullow Oil PLC, PMO.LN / Premier Oil
PLC, 386.HK / China Petroleum & Chemical Corp, NBL / Noble Energy Inc.
This research publication covers six or more companies. For price chart disclosures, please visit, you can
also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or
Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein
(Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central,
Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a
licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance,
30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.
12-Month Rating History as of 08/14/2013
Ticker Rating Changes
1088.HK U (RC) 12/14/11
1171.HK U (RC) 12/14/11
135.HK M (DC) 01/28/13 O (IC) 01/28/13 M (RC) 12/10/12 O (RC) 09/17/12 M (IC) 06/23/10
1798.HK M (RC) 05/22/12
1898.HK U (RC) 06/13/12
2.HK U (RC) 01/12/12
2688.HK U (RC) 09/17/12 M (RC) 01/05/12
2883.HK M (RC) 01/08/13 O (RC) 04/17/12
3.HK U (IC) 06/23/10
386.HK M (RC) 03/28/13 O (RC) 10/05/12 M (RC) 03/09/12
6.HK M (IC) 06/23/10
836.HK M (RC) 03/07/13 O (RC) 03/03/11
857.HK O (RC) 07/08/13 M (RC) 04/20/11
883.HK O (RC) 12/01/11
902.HK M (RC) 03/07/13 O (IC) 06/23/10
916.HK O (RC) 01/31/13 M (RC) 05/22/12
958.HK O (RC) 01/31/13 M (RC) 05/22/12
991.HK M (RC) 03/03/11
AEP M (IC) 01/15/03
APA O (IC) 05/13/11
APC O (RC) 06/28/12
BG/.LN O (IC) 01/22/09
BHI O (RC) 10/01/09
CEO O (RC) 12/01/11
CHK M (RC) 06/13/12
CNE.LN M (RC) 01/29/13 O (IC) 01/22/09
D M (RC) 09/04/07
DO M (RC) 07/26/10
DUK M (RC) 08/05/04
DVN M (IC) 05/13/11
ECA M (IC) 05/13/11
ECA.CN M (IC) 05/13/11
EIX O (RC) 06/14/13 M (RC) 12/03/12 O (RC) 08/18/11
EOG O (RC) 11/02/11
ESV O (RC) 06/28/12
EXC M (RC) 02/05/10
FE M (RC) 10/27/10
GALP.PL O (RC) 05/26/10
HAL O (RC) 06/28/12
HNP M (RC) 03/07/13 O (IC) 06/23/10
LKOD.LI M (RC) 06/28/12
NBL M (RC) 01/08/13 O (IC) 05/13/11
NBR O (RC) 09/07/07
NE O (RC) 03/01/11
NVTK.LI O (RC) 06/28/12
OGZD.LI O (RC) 07/16/09
ONGC.IN M (RC) 11/17/09
OSH.AU O (IC) 06/29/09
PCG O (RC) 03/27/13 O (RC) 03/22/07
PMO.LN O (RC) 06/28/12
PTEN M (RC) 10/03/11
PTR O (RC) 07/08/13 M (RC) 04/20/11
RDC M (RC) 02/19/09
RIG O (RC) 02/19/09
RIL.IN O (RC) 05/27/13 M (RC) 07/11/12
ROSN.LI M (RC) 01/29/13 O (RC) 06/28/12
SGGD.LI M (RC) 06/28/12
SLB O (RC) 08/11/11
SNP M (RC) 03/28/13 O (RC) 10/05/12 M (RC) 03/09/12
STL.NO M (RC) 06/28/12
STO M (RC) 06/28/12
STO.AU M (RC) 04/20/11
TLM O (RC) 06/28/12
TLM.CN O (RC) 06/28/12
TLW.LN O (IC) 01/22/09
WFT M (RC) 06/28/12
WPL.AU O (RC) 01/08/13 M (RC) 08/23/11

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and
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