BUY: PetroChina (0857.HK), Target price: HKD13.50

Oil and gas discoveries in Jidong and Longgang, and also more discoveries are expected from the exploration and production (E&P) segment which will benefit PetroChina’s share price. Refining margin has also improved. The booming natural gas sales and upcoming A-share listing are another two catalysts.
UOB KayHian raised net profit forecast by 6% and 15% for FY07 and FY08 respectively. Target price was raised to HK$13.50 from HK$11.50, which represents 15.4x and 14.7x of FY07 and FY08 earnings respectively.

Crude oil price will stay high.
Benchmark crude oil price forecasts revised to US$63, US$60 and US$60 per barrel from US$60, US$55 and US$55 per barrel for FY07, FY08 and FY09 respectively. The sensitivity analysis has shown that every US$1 change in the benchmark Brent crude price will impact EBIT/share by about 2 HK cents for PetroChina’s E&P segment.

Expecting more discoveries.
By end-06, the estimated proved reserves for PetroChina were 11.6b bbls of crude oil and 1,527.6 bcm of natural gas. The two big discoveries, Jidong and Longgang, will enhance PetroChina’s oil and gas proved reserves by 25.5% and 45.8% respectively. This is significant in
size. Yet the market is expecting more positive newsflow. Exploration developments may take place in Changbei field, Sichuan basin and Xijiang.

Refining margin improved.
The refining segment is expected to turn around in 2006 vs EBIT suffering a loss of about Rmb30b in 2006. This is because NDRC has not changed refined product prices much in spite of the sharp fall in crude oil prices in 1Q07. A decent EBIT of Rmb22b and Rmb31b is expected in FY08 and FY09, prompting Beijing to release a new pricing mechanism in 2H07.

Booming gas demand.
The government plans to raise the ppt of gas consumption in total energy consumption to 5% in 2010 from about 3% in 2006. To facilitate the usage of natural gas, construction of infrastructure, including terminals and pipelines, commenced in 2000. With the completion,
there should be a strong jump in gas consumption. PetroChina’s natural gas is expected to maintain 30% CAGR in FY07-09, both from sales and operating profits.

Valuation.
Earnings forecast raised by 6% and 15% for 2007 and 2008 respectively, primarily to reflect higher crude oil price forecast. Target price is raised to HK$13.50 from HK$11.50. It’s a BUY call.