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On Apr 3, 2013, we upgraded Chinese energy giant PetroChina Co. Ltd. (PTR - Analyst Report) to Neutral from Underperform, reflecting a balanced risk/reward profile.

Why the Upgrade?

Going forward, the main growth driver for PetroChina will likely be its leverage to the fast-growing Chinese market and the ever expanding market/resource base. Being one of two Chinese integrated oil companies, PetroChina is well-positioned to capitalize on the country’s favorable trends. The Beijing-based integrated is also successfully expanding its footprint in strategic locations like Canada and Australia.

Detailed Analysis

China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players (like PetroChina) that can meet the country’s fast-growing energy needs. Additionally, we expect the company – the world's biggest listed oil producer by volume ahead of Exxon Mobil Corp. (XOM - Analyst Report) – to benefit from attractive growth prospects in the downstream and natural gas sectors.

We like PetroChina’s recent natural gas deals in Canada and Australia. The Chinese behemoth’s plans – to form a joint venture in Canada's Alberta to develop natural gas/condensates assets and to purchase interests in the proposed Western Australian Browse liquefied natural gas (LNG) project – will provide it with a global resource and market base, making the company a leading international energy player. Additionally, these ventures will also provide a hedge against the uncertain Chinese product pricing policies.

However, we are concerned about prospects for the company’s oil production growth, considering its heavy exposure to significantly mature-producing areas. Other near-term headwinds include high-priced gas imports amidst low domestic gas sale prices and an ambitious investment program.

Stocks That Warrant a Look

While we expect PetroChina to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at NGL Energy Partners L.P. (NGL - Snapshot Report) and Calumet Specialty Products Partners L.P. (CLMT - Snapshot Report) as good buying opportunities. These oil refining and marketing partnerships – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.
 

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