PetroChina Shares Indicated Higher Amid BofA's Upgrade To Buy

PetroChina Company Limited (ADR) PTR shares are down 4 percent since March 18. BofA Merrill Lynch’s Sonia Song upgraded the rating for the company to Buy, with a price objective of HK$7, which implies 31 percent upside. The analyst named the stock as their top pick among China oils.

The three main positives were enumerated as:

1. PetroChina’s earnings are highly leveraged to a recovery in oil
2. E&P reserve valuation appears significantly more attractive compared to China oils and global peers
3. While there is a decline in policy risk on oil recovery, there is upside to “consensus expanding massively”

Oil Price Leverage

Oil price is expected to rebound from their 1Q16 trough of $29 to $47 by mid-year, to $54 by yearend and to $61 in 2017, backed by continued decline in US shale production and robust demand growth, analyst Sonia Song said.

“PetroChina’s oil price leverage to EPS and cash flow is high because the company has extensive E&P operation and the profitability of gas pipeline segment, the 2nd biggest earnings contributor, is also highly linked to oil price fluctuations,” Song wrote.

E&P Reserve Valuation

PetroChina’s shares have declined 46 percent over the last 18 months, significantly higher than the decline in the shares of peers.

Earnings Beat

The analyst expects the company to record a massive beat in FY16-17, due to declining policy risk on the back of oil’s recovery.