Thursday, November 19, 2009

China Hot Stock: PetroChina Co. Ltd. (NYSE: PTR)

China’s economic recovery, powered by its own stimulus package, shows no signs of letting up. The world's fastest growing economy has picked up over the course of the year, with third-quarter GDP growth expanding to an annual 8.9 percent from 7.9 percent in the second quarter and 6.1 percent in the first, virtually assuring China of reaching its 8 percent full-year target.

PetroChina, the largest listed Chinese oil company by market capitalization, offers potential opportunity to participate in country's economic recovery. PetroChina is an integrated oil and gas company whose operations include oil and gas exploration and production, refining, and the marketing and transportation of oil, refined products, natural gas, and other petrochemicals .PetroChina is the largest oil and gas producer in China and the second largest company in China in terms of revenue. PetroChina, with a market cap of $234.4 billion, is the world's most valuable company after Exxon Mobil (NYSE: XOM). Sales of refined products accounted for 80 percent of PetroChina’s revenue in 2008 and oil exploration the rest.

PetroChina is a holding company of China National Petroleum Company, the largest state-owned vertically integrated oil and gas company in China. The Chinese government owns 88% of PetroChina- and has control over appointing the board of directors. China's government tends to award contracts for operations within the country - exploration and production, for example, or retail station operation - and as an affiliate of the largest state-owned oil company; PetroChina gets the lion's share of China's oil business.

Late in October, the Beijing-based oil producer and refiner posted a 24 percent drop, primarily due to lower crude oil prices and weak demand amid the global economic crisis. Profit for the three months ending Sept. 30 was 30.8 billion yuan ($4.5 billion) or 0.17 yuan (2 U.S. cents) per share, compared with 40.1 billion yuan or 0.22 yuan per share a year earlier, the Beijing-based oil company reported. Total revenue fell 12 percent from a year earlier to 267.7 billion yuan ($39.3 billion).

For the nine months ended Sept. 30, profit fell 14% to 81.35 billion yuan from a year earlier. PetroChina cut its crude oil production 3.7% in the January-September period. However, the company's natural gas output rose 11.3% during the period. The average selling price of its crude oil in January-September period dropped 49.5% to $49.06 a barrel, the company said. The Chinese state-controlled oil giant refined 607.1 million tons of crude oil in the nine-month period, down 5.5% from a year earlier.

New York crude, which hit an all-time high in July last year, averaged 42 percent lower in the reporting period from a year earlier. But prices have since risen 78 percent this year.

Analysts expect the company's fourth-quarter profit to be boosted by stronger oil demand and higher fuel prices. The company is expected to get a boost as government recently increased gasoline and diesel prices for the first time in more than two months. The price increase of 480 yuan ($70.3) per ton was announced by the National Development and Reform Commission and translates into a 6.5% increase in gasoline prices and a 7.2% rise for diesel prices. The nation has revised prices eight times since December, including November's, compared with two adjustments in 2008. The fuel price adjustment is expected to encourage refineries to boost production and guarantee domestic supply.

Meanwhile, China oil demand has remained strong. The International Energy Agency this month raised its forecast for global oil demand in both 2009 and 2010 due to optimistic demand expectations in China. The fastest growing economy may use 8.3 million barrels of oil a day in 2009, 9.8 percent of the world’s oil use and 46 percent of Asia’s, according to data from Paris-based International Energy Agency.

PetroChina is aggressively developing and expanding its overseas business. China’s dependence on overseas oil tops 50%, and domestic oil and gas demand are certain to grow further. PetroChina plans to use the economic downturn, when energy and assets prices have declined on the whole, to develop as a comprehensive international energy concern. The company is planning to complete arrangements for five oil and gas cooperation areas worldwide within 8 to 10 years, and to increase its overseas oil and gas production to 200 million tons. According to its latest expansion plan, in the next 10 years PetroChina looks to increase its overseas oil and gas production by at least 130 million tons. PetroChina plans to use this period to basically complete the construction of five oil and gas cooperation areas, of different scales, in Mid-Asia, Africa, South America, Middle East, and Asia-Pacific.

The company has already started conducting the preparatory work to build the second phase of the Central Asia-China natural gas pipeline from Kazakhstan Beyneu to Shymmken. Phase II of the natural gas pipeline will extend 1,480 kilometers and run in the north of the Aral Sea. The second pipeline is scheduled to come into operation at the end of 2010.

Early in November, the oil and gas producer agreed to pay C$1.9 billion ($1.7 billion) for a stake in two oil sands projects in Canada to tap the rich deposits in the country. Oil sands in western Canada are the second largest oil reserve in the world behind Saudi Arabia, but they were long neglected as hey are more expensive to exploit than conventional crude oil deposits, making them more sensitive to capital investment. The transaction will enable PetroChina to diversify its energy supplies to enhance energy security.

In mid-November, Qatargas signed a Memorandum of Understanding with Petrochina to supply two million tonnes of LNG per annum to China. The timing of the supply of the two million tonnes of LNG as contemplated by the MOU is expected to start in the first half of the next decade.

PetroChina will merge its oiltrading books with Singapore Petroleum Co. in December and the two companies will trade as a single entity by the start of 2010.The acquisition was completed on Oct. 16, after PetroChina's mandatory offer was accepted by remaining shareholders, giving it sole control of the company. The merger will expand its fuel oil storage capacity to rival the market's top players and give it more demand outlets in the world's largest marine fuel market. The merged entity will have up to 450,000 tonnes of mostly ex-wharf bunker sales a month, or 14 percent of the average monthly levels of around 3 million tonnes in Singapore, the biggest fuel oil outlet in Asia.

Looking at the key statistics, the company's stock currently trades at a forward P/E (fye 31-Dec-10) of 10.92 and PEG ratio (5 yr expected) of 2.33. In terms of stock performance, PetroChina shares have gained 36% since the beginning of the year.

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