May 1, 2005

Analyst: Raymond Kwan Ian Madsen, MBA, CFA, Editor

1-800-767-3771, x417;

www.zackspro.com 155 North Wacker Drive l Chicago, IL 60606

PetroChina Co Ltd (PTR-NYSE) – $59.71

Overview

PetroChina Company Limited is engaged in a broad range of petroleum and natural gas related activities, including the exploration for, and the development, production and sale of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sale of basic petrochemical products, derivative chemical products and other chemical products, and the transmission of crude oil, refined products and natural gas, as well as the sale of natural gas. The Company owns and operates domestic pipeline networks. The Company’s head office is located in Dongcheng District
Beijing with employees totaling 424,175. Additional information about the company can be found at www.petrochina.com.cn

Analysts have identified the following factors for evaluating investment merits of PTR.

Key Positive Arguments / Key Negative Arguments
·  PetroChina’s 2004 net income was Rmb102.9B, up 48% YoY.
·  PTR’s 2004 upstream production output increased 3.2% to 918 mmboe.
·  Company’s refinery utilization rates and refinery throughput jumped 760 bps and 12.3% YoY to 93.2% and 698 mmbbl for FY2004, respectively.
·  PetroChina’s Chemical segmental EBIT surged from Rmb1.04B in FY2003 to Rmb7.66B in FY 2004 due to rising chemical prices and solid chemical production rates.
·  Company recently completed construction of the West-East Pipeline, which is capable of transporting up to 12B cubic meter of natural gas.
·  Company has been in contact with CNPC to purchase international E&P assets, which may boost growth going forward. / ·  PetroChina is exposed to the downside risk of falling oil prices. Currently, analysts are forecasting long-term oil prices for FY2006 and beyond in the range of $35.00-37.50/bbl (WTI Crude).
·  Projections for free cash flow beyond FY2004 appear negative, which may hamper the Company’s dividend yield or require PetroChina to seek external financing.
·  Year-over year DD&A costs crept 14.5% higher for FY2004 due to impairment of assets and increased PP&E.
·  Possible widening of the $US/Rmb currency band and the appreciation of the Rmb may lower the Company’s earnings.

PetroChina Co Ltd posted exceptionally solid FY2004 results. Net income was Rmb102.9B, up 48% YoY and slightly ahead of the consensus estimate of Rmb100.6B. Segmental results grew at a torrid pace with the E&P, R&M, Chemicals, and Natural Gas and Pipelines divisions posting a 36%, 140%, 640%, and 32% YoY EBIT gain, respectively. The strong results were attributed to higher commodity prices coupled with improved refining efficiencies but offset by elevated DD&A costs. Management also indicated a final dividend payment in early June 2005 of Rmb0.148 per share. Analysts continue to believe earnings growth for PTR will be positive going forward; however, the reliance on high commodity prices is a future risk that may hamper the Company’s ability to maintain its attractive dividend. Overall, the general sentiment for PetroChina is neutral to slightly positive.

Revenues

Total Revenues

Fiscal Year Ends: December Rmb in millions / FY2003A / FY2004A / FY2005E / FY2006E / FY2007E
Digest High / 303,900.8 / 388,795.7 / 460,085.0 / 446,157.0 / 366,323.8
Digest Low / 303,779.0 / 388,633.0 / 381,699.7 / 352,405.1 / 366,323.8
Digest Average / 303,839.9 / 388,714.3 / 420,892.4 / 399,281.0 / 366,323.8
Digest Average YoY Growth / nf / 27.93% / 8.28% / -5.13% / -8.25%

Analysts are forecasting ~8% top-line growth for FY2005. Management has indicated growth targets in crude output and natural gas production of 1% and 20% for FY2005. Additionally, the Company expects FY2005 refinery throughput and retail marketing volumes to increase by 7% and 10.3%, respectively. Analyst also project meaningful revenue growth from the Gas Pipeline divisions for FY2005 due to the recent completion of the West-East Pipeline.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

FY2004A / FY2005E / FY2006E / Trend
(up/down)
EBITDA Margins / 49.66% / 46.42% / 39.50% / DOWN
Operating Profit Margins / 37.71% / 34.58% / 26.49% / DOWN

EBITDA and operating margins are anticipated to trend lower for FY2005 and FY2006 due to lower projected commodity prices and higher DD&A and exploration expenses. Notably, analysts are forecasting long-term oil prices in the range of US$35.00-$37.50/bbl (WTI Crude) for FY2006 and beyond compared to the average WTI price of US$40.8/bbl in FY2004.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings Per Share

Fiscal Year Ends: December
$US in millions / FY2003A / FY2004A / FY2005E / FY2006E / FY2007E
Digest High EPS / 4.78 / 7.07 / 7.30 / 5.68 / 5.91
Digest Low EPS / 4.78 / 7.07 / 6.90 / 5.68 / 5.91
Digest Average / 4.78 / 7.07 / 7.10 / 5.68 / 5.91
Digest Average YoY Growth / 0.00% / 47.91% / 0.42% / -20.00% / 4.05%

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Target prices for PTR range from US$64.00 to US$71.49 with an average model price of US$67.80. The upper valuation bound is established using a blend of DCF and EV/EBITDA estimate, while the lower valuation estimate is based on a 6.1x 2005E FV/EBITDA and 9.3x 2005E EPS.

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Long-Term Growth

With crude production growth targets for 2005 in the low single digits (~1%), PetroChina’s long-term growth prospects is primarily contingent on the outlook for commodity prices. The Company’s E&P segment is currently facing maturity, particularly in the replacement of oil production. The only growth catalyst within the E&P segment is the exploration and production of natural gas, although natural gas contributes marginally to earnings. With respect to commodity prices, analysts are forecasting long-term oil prices in the range of US$35.00-$37.50/bbl (WTI Crude) for FY2006 and beyond compared to the average WTI price of US$40.80/bbl in FY2004. Analysts expect demand to outstrip supply in the Asia-Pacific region with one analyst (Bear, Stearns, & Co) forecasting annual oil deficit increasing by ~1,100-1,400 Mbbl/d until 2010. Management has also been relatively mute on plans to consolidate overseas assets from its parent CNPC. According to one analyst (Merrill Lynch), the acquisition of CNPC overseas assets may solve the Company’s “lack of production growth”. However, given the possibly premium acquisition price and sovereign risk, CNPC’s assets may be an investment concern for PTR.


Individual Analyst Opinions

POSITIVE

Smith Barney – The stock is rated BUY (1) with a target price of US$64.00. Analyst expects over the next 12 months the Company’s share price to converge to its target price because of the Company’s strong financial position, turnaround in the refining and marketing segment, and buoyant oil prices.

NEUTRAL

Bear, Stearns & Co. Inc – The stock is rated PEER PERFORM with a price target of US$71.59. Analyst recently raised PTR’s target price to US$71.59 due to higher projected oil prices going forward; however, the analyst still reiterated their “peer perform” rating because of the potential “Yuan” currency appreciation and continued petroleum pricing controls. It should be noted the analyst raised their FY2005 oil price estimate from US$36.00/bbl to US$44.00/bbl and FY2006 oil price estimate from US$29.00/bbl to US$37.50/bbl.

Merrill Lynch – The stock is rated NEUTRAL with no given price target. Analyst remains “neutral” on the Company shares because of the limited valuation upside as well as the potential downside risks in case of a lower commodity price scenario.

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