On Nov 15, 2013, we downgraded Chinese energy giant
PetroChina Co. Ltd.
) to Neutral from Outperform. Our revised investment thesis is
supported by a Zacks Rank #3 (Hold).
MATADOR RESOURC (MTDR): Free Stock Analysis
PETROCHINA ADR (PTR): Free Stock Analysis
SM ENERGY CO (SM): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis
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Why the Downgrade?
Despite PetroChina's leverage to the fast-growing domestic market
and the ever expanding market/resource base, we remain concerned
by its sluggish oil production growth prospects and heavy
exposure to significantly mature producing areas. Regulated
prices, policy uncertainty and an ambitious investment program
add to the downbeat sentiment.
China's impressive economic growth has significantly increased
its demand for oil, natural gas and chemicals. This growth
momentum presents attractive opportunities for industry players
(like PetroChina) that can meet the country's fast-growing energy
needs. Additionally, we expect the company - the world's biggest
listed oil producer by volume ahead of
Exxon Mobil Corp.
) - to benefit from attractive growth prospects in the downstream
and natural gas sectors.
We like PetroChina's natural gas deals in Canada and Australia.
The Chinese behemoth's plans - to form a joint venture in
Canada's Alberta to develop natural gas/condensates assets and to
purchase interests in the proposed Western Australian Browse
liquefied natural gas (LNG) project - will provide it with a
global resource and market base, making the company a leading
international energy player. Additionally, these ventures will
also provide a hedge against the uncertain Chinese product
The recent decision by the Chinese government to allow PetroChina
to raise gas prices - the first time in three years - is a
long-term positive for the company. The move would not only boost
the state-run energy major's margins but also cut its import
However, the major long-term concern for PetroChina continues to
be its prospects for oil production growth. With about a third of
its current crude oil volumes coming from the Daqing Oil region,
the company is heavily exposed to this area. The Daqing Oil
region is the largest crude oil producing area in China, but has
significantly matured over the years and is currently well past
its prime. As the degree of difficulty in extracting crude oil
from the mature Daqing field increases over time, costs at these
fields will continue to increase.
Other near-term headwinds include PetroChina's limited
international exposure and an ambitious investment program.
Stocks That Warrant a Look
While we expect PetroChina to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
Matador Resources Co.
SM Energy Co.
) as good buying opportunities. These U.S. upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with the potential to rise significantly
from the current levels.