PetroChina reported third-quarter results that included decreasing refining losses, which we attribute to China’s adjusted refined product pricing mechanism. Exploration and production operating profit for the quarter was roughly even with the same period last year, but broke a sequential downtrend in 2013 over the first six months of this year. On the whole, PetroChina’s quarterly results were reasonably close to our expectations, and we are maintaining our fair value estimate of $147 per share and narrow moat rating.

Oil production for the quarter was up 1.2% to 2.54 million barrels per day, and marketable natural gas production was up 11% to 7 billion cubic feet per day, versus the third quarter of 2012. The faster PetroChina can increase natural gas production the better, as the firm realized a net loss on natural gas imports of CNY 31.7 billion, nearly wiping out any profit from the natural gas and pipeline segment.

Offsetting natural gas imports with domestic production will be crucial to PetroChina’s long-term profitability, unless the country further adjusts the pricing mechanism to raise selling prices for all consumers. Although prices were recently raised, residential consumers were excluded.

Capital spending has run slightly behind our 2013 forecast. We are hesitant to trim our estimate since we’ve observed a trend of higher upstream spending with peers Sinopec and CNOOC, Ltd. Longer term, we continue to believe that China’s oil demand will be robust, even under lower GDP growth, and we think increased investment to deliver additional production of oil and natural gas volumes will continue.