There has been some weakness in PetroChina Co. Ltd. (PTR) ADRs due to the pullback in crude oil prices, but they are hardly cheap. Based on most conventional valuation metrics, they trade either in line or at a premium to their Chinese and emerging market peers.
Relative to the super majors, the ADRs trade at a significant premium, primarily reflecting the company's leverage to the high-growth Chinese market. But fuel price caps and heavy taxes offset most, if not all, of the Chinese market positives, in our view. As such, we consider current valuation to be fair and prefer staying on the sidelines for now.
Growth prospects are particularly attractive in the downstream and natural gas sectors. Strong growth in China's middle-class and in automobile ownership is expected to fuel consumption of refined petroleum products. The company's steadily growing natural gas volumes, investments in transportation assets and the Chinese government's efforts to promote natural gas as a substitute for coal in power generation provide for attractive long-term growth opportunities.
Our key concern about PetroChina continues to be its long-term crude oil production growth prospects. With more than 35% of its current crude oil volumes coming from the Daqing Oil region, the company is heavily exposed to this region. 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. What's more, high crude oil prices are also impacting the near-term outlook for Chinese refining margins.
Read the full analyst report on PTR
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