We have downgraded PetroChina Co. Ltd. (NYSE: PTR - News) ADRs to Neutral from Outperform, particularly driven by the high-priced gas imports in the face of low domestic gas sale prices.
As more high-priced gas import is being brought in, there is an urgent need for PetroChina to press the government to raise artificially low domestic gas sale prices to global levels. As of now, gas imports are coming at a loss, thereby pressurizing the company’s profitability.
Sluggish growth prospects for oil production and heavy exposure to significantly mature producing areas also remain near-term headwinds, in our view. Regulated prices and policy uncertainty add to the downbeat sentiment.
Additionally, PetroChina has projected an investment of RMB 350.6 billion in 2011, up 27% year-over-year. This is expected to substantially increase the company’s leverage and damage its credit metrics. The increasing capital intensity of its operations may also result in reduced returns going forward.
Given these headwinds, we expect PetroChina ADRs to perform in line with the broader market. We think that the current valuation is fair and adequately reflects the company’s future growth prospects.
PetroChina is the largest integrated oil company in China and the world's most valuable oil and gas producer after Exxon Mobil Corp. (NYSE: XOM - News). The firm’s activities include: exploration, development, production and sale of crude oil and natural gas, refining, transportation, storage and marketing of petroleum products, manufacture and sale of chemical products, and transmission of natural gas, crude oil and refined products.
PetroChina was established in November 1999 as part of a restructuring of China National Petroleum Corporation, a state-owned entity, which currently holds a majority stake of 86.20% in PetroChina. The company operates in four segments: Exploration & Production, Natural Gas & Pipelines, Refining & Chemicals, and Marketing, which accounted for 78%, 10%, 4%, and 8%, respectively, of its fiscal 2010 operating profit.