How's this for an analogy: Just as drivers like to fill up their tanks when gas prices are low, investors should take advantage of the recent weakness in shares of PetroChina (NYSE: PTR) -- down some 12% since the beginning of the year -- to top off their positions in this Chinese energy behemoth.
I know, I know ... it might seem a little risky to be investing in shares of a state-owned Chinese oil play in the face of the recent decline in oil prices. After all, the price of a barrel of West Texas Intermediate (WTI) crude is down 16% since the New Year and off close to 34% since peaking last July. Still, I firmly believe that the long-term fundamentals of the oil patch remain sound, and that PetroChina represents the best integrated play in the sector, more so than ExxonMobil (NYSE: XOM), BP Group (NYSE: BP) or even Motley Fool Income Investor pick Total (NYSE: TOT).
Simply put, the long-term prospects of the oil industry remain bright, thanks to continued demand growth from developing nations such as India, China, and Brazil (OPEC estimates that global oil consumption will increase 1.6% in 2007); limited spare refining capacity worldwide; declining production rates in key regions such as the North Sea; and the uncertain political environment in many oil-producing nations such as Nigeria, Venezuela, Iraq, Iran, etc.
Given this outlook, most oil stocks should perform well again in 2007, and I believe that PetroChina will lead the pack. In its favor are strong domestic demand, relatively robust production growth, an attractive valuation, and a yield of roughly 4.1%.
Let's take a quick look and make sure I haven't lost my Foolish mind, shall we?
According to a recent report by the International Energy Agency (IEA), Chinese oil demand is expected to grow by 5.4% in 2007, a slight slowdown from the estimated 6.4% increase in 2006, but still well ahead of the global average. PetroChina is well-positioned to benefit from this demand growth, as the company just reported that it increased its production of oil and natural gas by 5.2% in 2006 to 1.062 billion barrels of oil and equivalents (BOE). To put this increase in perspective, western majors such as Repsol (NYSE: REP) and Royal Dutch Shell (NYSE: RDS-A) actually reported production declines during the year. I believe that PetroChina's stated goal of increasing production at an annual rate of at least 5% through 2010 is achievable; an increased emphasis on natural gas production, as well as overseas acquisitions, will help the company's profits will climb accordingly.
PetroChina also benefits from certain advantages that are hard to quantify. The first of these is the likelihood that the yuan will appreciate against the dollar. According to The Xinhua Economic Information Department, the yuan will appreciate 5% in 2007, compared with the 3.3% rise of the currency in 2006, and a stronger yuan translates into higher profits when reported in dollars. Likewise, the fact that PetroChina is a state-owned Chinese company gives the company certain competitive advantages in terms of access to oil fields that are off-limits to most Western oil companies. China National Petroleum Corp's (CNPC) -- PetroChina's parent -- recent agreement with Iran to develop a $3.6 billion liquefied natural gas project is ample evidence of this trend, as are recent deals to develop fields in Venezuela.
Hmm ... strong demand growth and expanding production coupled with a strengthening currency and access to resources unavailable to others.... Sounds like a pretty compelling investment story to me, especially given PetroChina's attractive valuation.
At a recent price of $127 per ADS, shares of PetroChina trade at only 11 times fiscal 2007 estimates, while offering a yield of roughly 4.1%. Given this valuation and the company's above-average growth prospects, I believe that energy investors should take advantage of the recent weakness in PetroChina's shares to pump up their positions in this up-and-coming energy giant.
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Fool contributor Will Frankenhoff is enjoying his time writing for The Fool more than reading the Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
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