A comprehensive gas service provider. China Oil and Gas Group Co., Ltd. (CNPC) mainly invests in natural gas and energy-related projects. The company's natural gas business is quite extensive, including downstream urban gas distribution business; midstream gas filling station business, branch long-distance pipeline, and liquefied/compressed natural gas tanker transportation; and upstream LNG plant in Qinghai and oil and gas extraction projects in Canada. As of the first half of 2017, CNPC has a total of 74 urban gas concession projects, 55 gas stations, 1,055 kilometers of branch gas pipelines, 7,530 kilometers of urban gas pipelines, and gas distribution services covering 12 million people in China.
Gas sales increased more than 20% in 2017. Most of CNPC's urban gas projects are operated through CNPC Zhongtai, its main subsidiary. The company holds 51% of CNPC Zhongtai's shares, and CNPC's Kunlun Energy (135 HK) holds the remaining 49% of the shares. In the first half of 2017, gas sales reached 1,602 million square meters, an increase of 15.1% over the previous year. Among them, the sales volume of industrial and commercial users recorded 991 million square meters, an increase of 31.1% over the previous year, while the sales volume of residential users recorded 453 million square meters, which remained stable over the previous year. According to our recent communication with management, the increase in industrial and commercial gas consumption is mainly due to the endogenous increase in gas demand brought about by regional economic improvements. At the same time, management confirmed that the momentum for gas consumption growth accelerated further in the second half of the year. Furthermore, the high growth rate of industrial and commercial gas sales has also led to a marked expansion in the gross gas gap. Management expects gross gas sales margin to rise to RMB 0.4 per cubic meter throughout the year. Based on this, we judge that CNPC gas sales in 2017 are likely to increase by more than 20%.
The upstream oil and gas extraction business will gradually recover and make a significant profit contribution. Due to the impact of low oil prices over the past few years, the company's oil and gas extraction business in Canada has suffered a major blow in the past. In response to lower oil prices, CNPC has implemented a number of measures to reduce mining costs since 2015. According to management, by the end of 2017, the cash mining cost for the Canadian project barrels of oil had been reduced to around 17 Canadian dollars, and the full cost was controlled at around 34 Canadian dollars per barrel. The average daily output is expected to reach 4,700 barrels for the full year of 2017, while management intends to push output to over 5,000 barrels in 2018. Based on the recent clear recovery in oil prices, we anticipate that the company's upstream oil and gas extraction business is likely to achieve significant profit contributions in 2018.
The valuation is very attractive compared to peers. The current trading price of CNPC gas is 11.4 times the 2018 market consensus price-earnings ratio, with a market capitalization of HK$4.7 billion. The current average valuation of gas distribution interbank transactions is 12.7 times the 2018 market consensus price-earnings ratio. Since the company's analysis currently covers only a small amount, we believe that the market's consistent forecast does not fully reflect the company's earnings per share growth. Based on our expectations that the industrial and commercial gas sales volume of the company's gas business will continue to grow and that the profit situation of the upstream oil and gas extraction business will improve markedly, we believe that the current valuation level of CNPC and Gas is very attractive.