PetroChina's Steep Price Advance Carries Higher Risk

As our buy recommendation of PetroChina Company Ltd. (PTR) has become too speculative for new commitments by conservative investors because of price, we emphasize restricting the weight of the stock among energy holdings to near 3% unlevered as in the illustrative McDep Portfolio.

Third quarter 2007 production volume reported Oct. 15 confirms a stable trend for oil and a rising trend for natural gas. Exploration news continues to be favorable with a large natural gas discovery in western China to complement the Jidong Nanpu oil find that caused us to raise estimated Net Present Value [NPV] earlier. Though stock price has exceeded NPV of $166 a share, there is open-ended upside to NPV from oil price, natural gas price and refined product price on top of volume growth.

Higher stock prices in China than outside China may be driving up PTR stock price in advance of an issue of new shares in the mainland Chinese market in a few weeks. Eventually Chinese stock prices and world stock prices may come closer together at a level higher than current world levels, but the road to that point could be bumpy.

Originally published on October 15, 2007.