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PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

PetroChina looks beyond its own borders for growth.

by Robert Bellinski Stock Analyst Analysts covering this company do not own its stock. Pricing data through July 29, 2011. Rating updated as of July 29, 2011. Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.

Thesis Jul. 20, 2011

Stock Price
232.0

PetroChinas creation began with the Chinese governments efforts to reform its oil and gas industry, foster competition, and develop the expertise necessary to compete internationally. One of two Chinese integrated oil and gas companies, PetroChina has become Chinas lone super major, with reserves of 22.2 billion barrels of oil equivalent--on par with other major international players. As Chinas largest oil and gas company, PetroChina looks to secure future domestic and international resources in order to feed a nation hungry for energy.

finished petroleum goods at fixed prices--all else equal, importing higher oil volumes would eventually run the company into the ground. Investing in international upstream development projects allows the firm to recapture the economic rent from exploration and production that it loses in the gap between domestic production and imports. As such, we believe that PetroChina will have a healthy appetite for acquisitions and joint ventures for an extended period. As years pass, we think the PetroChina of tomorrow will be focused increasingly on the production and marketing of natural gas. The combination of limited domestic oil production capability and the governments environmental concerns have set the stage for long-term demand growth for natural gas. The firm has tremendous resource potential to meet the anticipated demand from three primary production regions: the Changqing (or Ordos), Tarim, and Sichuan basins. These regions held a combined 50.9 Tcf of proven reserves, as of the end of 2010. The company has also been diligently building transportation pipeline at a rate of more than 4,000 km per year during the last three years. Despite the presence of resources and the construction of infrastructure, it is estimated that meaningful shale gas production in China is five to 10 years out. We agree with this timeframe, and we think the reason is twofold. Currently major service firms are reluctant (or refuse) to sell anything but commoditized technology into China due to weak intellectual property rights enforcement. Going forward, we also believe that lack of sufficient IP protection will suppress domestic innovation (that is, no entrepreneurs), lengthening the time that it takes PetroChina to travel down the shale gas learning curve. PetroChina faces significant economic headwinds in the form of government controls. Upstream activities, generally the most profitable operations in the industry, were hit in 2006 with a special oil levy that adds an incremental tax when oil prices are above $40 per barrel. In addition, the price of gasoline is fixed by the government, causing refining operations to lose money in

166.0

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The PetroChina of today is centered on the production, refining, and marketing of oil and petroleum based products. The emergence of the Chinese middle class has driven demand for cars, and therefore gasoline. As a result, PetroChinas marketing division has built new service stations at an astounding clip--more than 10,800 in the last decade. The firms refining arm has followed suit, with capacity growing to more than 2.9 million barrels per day, up 52% in the last 10 years. Conversely, oil production has not experienced similar growth. PetroChinas primary source of oil, the Daqing oil region in northeastern China, is in decline. Each year, the field requires increased usage of enhanced oil recovery, or EOR, techniques to maintain production. As a result, the companys oil imports have grown substantially--hitting 359.1 million barrels in 2010. In order to meet the imbalance between flat domestic crude oil production and increasing oil import levels, PetroChina has been forced to secure international supplies to meet domestic demand. The company has made numerous investments across the globe, including interests in Europe, Australia, Canada, and Iraq. We view these investments as crucial to PetroChinas future. The company is legally obligated to meet production levels of

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Close Competitors PetroChina Company, Ltd. Exxon Mobil Corporation BP Plc BP Plc

Currency(Mil) USD USD USD USD

Market Cap 260,311 393,052 143,448 143,448

TTM Sales 241,451 406,974 344,417 344,417

Oper Income 29,777 59,808 31,307 31,307

Net Income 21,908 34,810 20,096 20,096

controls of inputs and products. Long-term, we think that the firms natural gas and pipeline division will inevitably become the companys chief driver of returns, due to Chinas ample reserves and the relative environmental benefits of natural gas over oil and coal. In our discounted cash-flow model, our benchmark oil and gas prices are based on Nymex futures contracts for 2011-13. For natural gas, we are using $4.34 per thousand cubic feet in 2011, $4.80 in 2012, and $5.18 in 2013. For oil, we are using $97.32 per barrel in 2011, $99.68 in 2012, and $101.45 in 2013. We assume long-run oil prices of $95.00 per barrel and natural gas prices of $6.50 per mcf. We also assume a cost of equity of 12%. Finally, even if our thesis proves correct, fluctuations in currency exchange rates may affect the value of the PetroChina ADR. Our forecast for 2011 production is 3.4 million barrels of oil equivalent per day, at a ratio of 70% liquids to 30% gas. We expect operating costs to remain steady through 2015, at RMB 61.80 per barrel of production ($9.50/bbl). We forecast cash capital expenditures and exploration expense to be RMB 291.4 billion in 2011, rising to RMB 419.4 billion by 2015. Our 2011 earnings before interest, taxes, depreciation, amortization, and exploration expenses is RMB 367.5 billion, while our 2012 EBITDAX forecast is RMB 393.1 billion.

Morningstar data as of July 29, 2011.

the event of crude oil spikes, as was the case in 2008. Now, the government has vowed to revise refined product prices if oil prices fluctuate over a given period of time--though to date, the application of this rule has been inconsistent with the established guidelines. Given the states ownership and degree of control, as well as the questionable profit motives present in a centrally planned economy, potential and current shareholders can be permitted a fair degree of skepticism about PetroChina. While it is reasonable to expect that the company may never be allowed to experience superior returns (relative to its international peers), we think Chinas dependence on PetroChina to meet energy demand and fuel GDP growth, combined with the firms size and protected market position, will allow shareholders to benefit from exposure to a critical component of Chinas economic growth over the long term.

Valuation, Growth and Profitability

We are increasing our fair value estimate for PetroChina to $183 from $136 as we transition coverage to a new analyst. We expect strong cash flow generation from the firms exploration and production activities, mostly attributable to current oil and gas price levels. We think production levels (before joint ventures), will be flat to declining, with the exception being the Changqing oil and gas region, where we forecast production to grow at a five-year CAGR of more than 12%. We expect returns from the firms refining operations to be negligible, due to price

Risk

The firms expansion outside of China exposes it to geopolitical risk from which it was previously immune. Expansion plans could possibly include countries that are at risk for economic sanctions. With its operations primarily in China, the company is always at risk for new regulations or taxes by the Chinese government, such as the special tax levy implemented in 2006. Also, PetroChina will face increased competition, as imports rise with

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

energy demand growth and compliance with the World Trade Organization opens markets to foreign competitors.

Bulls Say

PetroChina is the largest provider of oil and gas in China--one of the fastest growing economies and the largest energy consumer in the world. PetroChina will expand its natural gas business, the largest in China, through the expansion of pipeline and distribution infrastructure, combined with Chinas promotion of natural gas. PetroChina can access resources in countries with the assistance of the Chinese government that may not be politically accessible to other companies.

we expect it will continue to do so. The company does not hedge its exploration and production activities, as prices are set by the government. Temporal mismatches between oil price increases and refined products prices could cause PetroChinas refining division to experience significant losses from time to time.

Company Overview

Bears Say

Profile: PetroChina Company, Ltd. is an energy company controlled by the Chinese government, with operations consisting of exploration and production activities, refining and marketing of petroleum products, production and marketing of petrochemicals, and the transmission and storage of natural gas. With reserves of 22.2 billion barrels of oil equivalent (51% oil) and daily production of 3.3 million barrels of oil equivalent per day (70% oil), PetroChina is Chinas largest producer of oil and gas. Management: The Chinese government owns 86.3% of PetroChina through its control of the parent company China National Petroleum Corporation, or CNPC. Control allows the Chinese government to appoint board members of their choosing, opening the door for potential cronyism and rewarding of Communist party members. The Chinese government, however, has a vested interest in seeing both of its state-owned oil and gas enterprises succeed, as they have the responsibility to meet Chinas future energy needs. Recent years have shown the Chinese government withdrawing from direct control of these firms and instead shaping energy policy through regulation. The interests of the Chinese government and shareholders actually align in the search for international resources. In this respect, PetroChina benefits through government coordination of international exploration efforts by Chinese firms. Executive compensation is modest compared with similar firms, with the top five paid executives taking home roughly $650,000 total in 2010. Approximately 75% of

The government may be reluctant to raise refined product prices if international oil prices rise dramatically, squeezing the business unit to the point of generating losses. Implementation of the special oil levy in 2006 took a bite out of profits, and will continue to hamper the companys ability to take full advantage of high crude prices. Refined products competition may intensify as other Chinese firms enter the market in high-demand areas and compliance with the WTO opens markets to imports.

Financial Overview

Financial Health: PetroChinas balance sheet is on par with those of any of its international competitors. A cash balance of RMB 115 billion ($17.7 billion) as of the first quarter of 2011 will provide the company ample flexibility to pursue acquisitions. Cash flow from operations has sufficiently covered capital expenditures historically, and

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

total compensation is variable for top executives. Share appreciation dictates the amount of variable compensation, but managers receive cash instead of shares, actually reducing long-term incentives and shielding downside risk.

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Analyst Notes
Jun. 27, 2011 Encana and PetroChina Part Ways on Cutbank Ridge Joint Venture

Though portrayed as an inability to negotiate mutually acceptable terms, we are inclined to think the now-failed Cutbank Ridge joint venture between Encana and PetroChina is more likely a case of cold feet on PetroChinas part. We previously noted the degree to which carried interest capital from foreign investors had been directed toward delineation drilling, versus production growth, which created dissatisfaction with returns on capital. Furthermore, we fail to see any reasonable incentive for Encana to back out; the uncertainty and operational complications associated with multiple development partners in the region is far less desirable, in our opinion. Finally, we find it incomprehensible that PetroChina (or any
Jun. 21, 2011 Encana and PetroChina Call it Quits in the Cutbank Ridge.

investor, for that matter) would commit to a $5.4 billion investment without finalizing all terms. However, we also concede that deal terms related to the venture may have prevented PetroChina from gaining access to the technical knowledge for domestic shale gas exploration that it desired, though this is purely speculation on our part. From the perspective of PetroChina and other foreign investors, we think the appetite for North American shale gas is still present, but expect future deals will exhibit more moderate price metrics and a larger degree of joint operational control.

Four months after Encana and PetroChina announced a joint venture to develop Encanas Montney assets at Cutbank Ridge, the firms announced that the deal has been scrapped. As originally planned, the joint venture included PetroChina paying $5.4 billion for a 50% working interest at Cutbank Ridge, which also included planned infrastructure of 700 million cubic feet per day (mmcf/d) of gas processing capacity, 3,400 kilometers of pipeline, and the Hythe gas storage facility. Encanas press release stated that the two parties were unable to reach acceptable terms in the joint operating agreement. We suspect that the degree of delineation drilling versus actual development activity also played a part in PetroChinas decision. Looking forward, there is a fair degree of uncertainty surrounding Encanas plans at Cutbank Ridge. The firm now
Jun. 15, 2011 Oil & Gas Mid-Cycle Price Update

states that it is looking to form additional joint ventures, separate from infrastructure assets. We do not have a gauge on potential counterparty appetite for such deals, but note that, with the wealth of undeveloped Canadian acreage currently available for joint venture interests, this may be difficult for Encana to accomplish in the near term. As for PetroChina, we doubt the collapse of this deal will do much to diminish its appetite for foreign resources or its desire to gain technical knowledge. We anticipate it will continue to look for other opportunities to partner in Canadian shale gas development. We will be revising our Encana valuation model to reflect the loss of PetroChinas deal proceeds, as well as Encanas future development plans at Cutbank Ridge. At this time, we anticipate a reduction to our fair value estimate.

We are updating our assumptions for midcycle oil and gas prices, reflecting fundamental changes in supply and demand that we believe to be structural in nature, and significant in impact. We are raising our midcycle price

assumption for West Texas Intermediate crude oil to $95 per barrel from $82/bbl and lowering our midcycle price assumption for Henry Hub natural gas to $6.50 per thousand cubic feet from $8.00/mcf.

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Analyst Notes (continued) nations, as supply growth has failed to keep pace with demand. Over the past decade, oil demand from emerging markets has increased by 50%, while developed nations have seen demand peak and decline by 5.5%. Looking forward, we believe that China, India and the Middle East will continue to support robust demand growth, to the extent that supply availability will allow, thanks to growing GDP per capita, urbanization, low vehicle penetration compared to developed nations, and subsidized fuel prices. Our natural gas focus is on North American gas fundamentals, which have been transformed in recent years by horizontal drilling and hydraulic fracturing, or fracking. The primary target of horizontal wells has been shale formations underlying conventional hydrocarbon reservoirs, and the impact on gas production has been profound. In 2000, shale gas accounted for roughly 1% of U.S. production, and by 2010 shale production had exceeded 13 billion cubic feet per day, or 23% of production. Gas prices responded to the glut of new production, and by our estimates it is now uneconomic to drill in most areas of dry-gas shales. We expect some moderation in supply growth, as producers shift focus to liquids-rich drilling opportunities that offer higher returns in today

Our midcycle oil and gas prices are based on an assessment of a base case, in which our estimate of marginal costs of production sets prices; a low case, reflecting our estimate of the points at which, if sustained, investment in new oil and gas production dries up; and a high case, reflecting our estimate of the points at which demand collapses. For oil, we estimate a marginal cost of $85/bbl and assume a low-case price of $50/bbl and a high-case price of $150/bbl. For gas, our analysis suggests a marginal cost of $6.50/mcf, a low-case price of $4.00/mcf, and a high-case price of $9.00/mcf. We equal-weight our three scenarios for each commodity to determine midcycle prices, as we believe downside risks are roughly balanced by upside potential. In our view, while we may not have quite reached a peak in total liquids production, we expect future crude oil supply additions to struggle to offset depletion and increasing demand from emerging markets. We believe that demographic and economic shifts in emerging markets support continued strong demand for crude oil and refined products, even in the face of historically high prices. Meanwhile, high prices drive demand destruction in developed nations, notably in 2008 but also in evidence this year. Effectively, emerging markets have been bidding away the incremental barrel of production from OECD
Jun. 15, 2011 Oil & Gas Midcycle Price Update

We are updating our assumptions for midcycle oil and gas prices, reflecting fundamental changes in supply and demand that we believe to be structural in nature and significant in impact. We are raising our midcycle price assumption for West Texas Intermediate crude oil to $95 per barrel from $82/bbl and lowering our midcycle price assumption for Henry Hub natural gas to $6.50 per thousand cubic feet from $8.00/mcf.

Our midcycle oil and gas prices are based on an assessment of a base case in which our estimate of marginal costs of production sets prices; a low case, reflecting our estimate of the points at which, if sustained, investment in new oil and gas production dries up; and a high case, reflecting our estimate of the points at which demand collapses. For oil, we estimate a marginal cost of

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Analyst Notes (continued) $85/bbl and assume a low-case price of $50/bbl and a high-case price of $150/bbl. For gas, our analysis suggests a marginal cost of $6.50/mcf, a low-case price of $4.00/mcf, and a high-case price of $9.00/mcf. We equal-weight our three scenarios for each commodity to determine midcycle prices, as we believe downside risks are roughly balanced by upside potential. In our view, while we may not have quite reached a peak in total liquids production, we expect future crude oil supply additions to struggle to offset depletion and increasing demand from emerging markets. We believe that demographic and economic shifts in emerging markets support continued strong demand for crude oil and refined products, even in the face of historically high prices. Meanwhile, high prices drive demand destruction in developed nations, notably in 2008 but also this year. Effectively, emerging markets have been bidding away the incremental barrel of production from OECD nations, as supply growth has failed to keep pace with demand. During the last decade, oil demand from emerging markets has increased by 50%, while developed nations have seen demand peak and decline by 5.5%. Looking forward, we believe China, India and the Middle East will continue to support robust demand growth, to the extent that supply availability will allow, thanks to growing GDP per capita, urbanization, low vehicle penetration compared to developed nations, and subsidized fuel prices. Our natural gas focus is on North American gas fundamentals, which have been transformed in recent years by horizontal drilling and hydraulic fracturing, or fracking. The primary target of horizontal wells has been shale formations underlying conventional hydrocarbon reservoirs, and the impact on gas production has been profound. In 2000, shale gas accounted for roughly 1% of U.S. production, and by 2010 shale production had exceeded 13 billion cubic feet per day, or 23% of production. Gas prices responded to the glut of new production, and by our estimates it is now uneconomic to drill in most areas of dry-gas shales. We expect some moderation in supply growth as producers shift focus to liquids-rich drilling opportunities that offer higher returns in todays price environment. However, we believe that gas demand from power generation, now one third of the 60 bcf/d of U.S. gas consumption, will lift demand for gas during the next five years. We believe utilities will use spare gas-fired power generation capacity from the construction boom in 2000-05 to meet nearly all of the incremental power needs from base demand growth, from lost supply from coal plants that cant meet new emissions regulations, and from reliability supply for renewable power projects. We estimate these drivers will lead to an incremental 14 bcf/d of gas demand from power generation by 2017, up 70% from 2010 power generation gas demand and representing 44% of our projected total U.S. gas demand in 2017. While we view the possibility of liquefied natural gas exports, compressed natural gas vehicles, and electric vehicles as potential additional positives to gas demand, we do not include their impact in our demand projections. As part of our review of commodity exposure, we also are updating uncertainty ratings across our oil and gas coverage. We are reducing uncertainty ratings for companies that have strengthened balance sheets, increased cash flow visibility, and benefit from long-term contracts that provide fee-based cash flow streams. Overall, we are reducing uncertainty ratings on approximately 40 energy stocks, shifting our average rating to medium/high from high/very high. We have updated a selection of high-profile stocks with our new oil and gas price decks, and are placing our remaining commodity-price sensitive stocks under review pending update. In general, we expect to see fair value estimate

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Analyst Notes (continued) increases for companies with production weighted toward oil and fair value decreases for gas-weighted stocks. However, we note that high-quality gas names are unlikely to see material fair value impacts due to superior asset quality, low production costs, and favorable economics
Apr. 08, 2011

even at a reduced midcycle gas price. We anticipate slight decreases to our fair value estimates for independent power producers and diversified utilities with power generation exposure due to reduced midcycle power prices.

China Raises Prices for Refined Products a Second Time This Year

Chinas National Development and Reform Commission (NDRC) announced it was increasing the price of gasoline and diesel by CNY 500 per ton and CNY 400 per ton, respectively. It marks the second time this year the NDRC has raised prices and the largest nominal increase in the last year. In February, it raised gasoline and diesel prices by CNY 350/ton each. In our view, higher prices only will go so far in securing refiners profitability. While the most recent changes equate to about $11 per barrel for gasoline and $8 per barrel for diesel, Brent has increased almost $20 per barrel and WTI is about $18 per barrel higher. As a result, Chinas refiners could be suffering losses currently. In the second half of 2010, we saw profit margins compress for refiners on our coverage list as the NDRC cut fuel prices in June and subsequent raises failed to keep pace with rising oil prices. PetroChina saw second-half refining profit margins fall to 0.7% from 1.7% in the first half of the year. Profit margins for Sinopec Shanghai Chemicals petroleum products segment fell to 1.1% in the second half of the year from 5.6% in the first half. Sinopec, Chinas largest refiner, saw performance improve in the second half of the year
Feb. 11, 2011

given completion of recent upgrading projects and increased diesel production. However, its full-year profit fell 42% from the year before, resulting in a profit margin of 1.6% in 2010 compared to 3.9% in 2009. Refiners also faced a similar situation in 2008 when international crude oil prices rose rapidly while domestic refined product prices remained stagnant. As a result of refiners suffering losses and the government providing subsidy payments as compensation, a new pricing system was put in place in early 2009. Under the new pricing structure, the NDRC can adjust retail fuel prices when crude oil prices change by more than 4% over 22 straight working days. However, as evident in the most recent revisions, product prices may still fail to keep pace with crude prices. Government officials may be reluctant to raise retail prices quickly in fear of stoking inflation concerns or harming economic growth. Given the recent sharp rise in crude prices, we anticipate a potential replay of 2008 with refiners posting large losses. And since the government suspended subsidy payments with the introduction of the new pricing system, 2011 losses could exceed those of 2008.

EnCana Reports Fourth-Quarter Results, 2010 Reserves, and Its 2011 Capital Plan.

On Thursday, EnCana reported fourth-quarter and year-end results for 2010. Production averaged 3,353 million cubic feet equivalent per day (mmcfe/d) for the quarter and 3,321 mmcfe/d for the entire year, slightly higher than our

quarterly and annual forecast of 3,325 mmcfe/d and 3,314 mmcfe/d, respectively. The Haynesville Shale continued to drive growth for the firm, with average daily production of 410 mmcfe/d, up from 335 mmcfe/d in the prior quarter. In the Horn River, annual production measured 29

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

PetroChina Company, Ltd. PTR


Last Price 142.23 USD Fair Value 183.00 USD Consider Buy 109.80 USD Consider Sell 311.10 USD Uncertainty High

[NYSE]

QQQQ
TM

Economic Moat Narrow

Stewardship .

Morningstar Credit Rating Industry XOM Oil & Gas Integrated

Analyst Notes (continued) mmcfe/d--significantly lower than managements forecast of 50 mmcfe/d. We expect that EnCanas partnerships in the Horn River and Montney, as well as continued development in the Haynesville, will drive mid single-digit production growth in 2011. Year-end proved reserves were 14.34 Tcfe (compared with 12.77 Tcfe at year-end 2009). The company changed its reserve reporting method from the U.S. standard of using constant prices and costs, to the Canadian standard of utilizing forecasted prices and costs. The change had the impact of increasing 2009 proved reserves 1.25 Tcfe from the previously reported year-end 2009 proved reserves of 11.52 Tcfe. Adjusting for the change in 2009 reserves, our forecast proved reserves would have been 14.26 Tcfe in 2010. Proved undeveloped reserves represented 49% of total proved reserves, and are planned to be converted to developed reserves within five years. The company also estimated net drilling locations increased by 2,000, to 37,000 locations. Reserve growth was led by the firms Haynesville acreage, where the company performed
Feb. 10, 2011

extensive delineation drilling, and the Horn River, where assessment by EnCana and neighboring producers provided Reserve Evaluators with additional information for consideration. The companys 2011 plans include capital spending of $4.6-$4.8 billion, with production of 3,475 mmcfe/d to 3,525 mmcfe/d, versus our expectations of $5.3 billion in capital spending and average daily production of 3,684 mmcfe/d. Spending and production by play have not yet been finalized --we anticipate the largest adjustment to our current forecast will be for the partnership with PetroChina at Cutbank Ridge. The company highlighted a number of new plays it is evaluating, including the Niobrara and Mancos in Colorado, and the Duvernay Shale in Alberta. Finally, the firm also noted that it will remain active in Michigans Collingwood Shale, as it continues to evaluate the reservoir--refuting our hypothesis that the company, as well as other producers, had lost interest in the region.

EnCana Forms Joint Venture With PetroChina to Develop Montney Assets

On Wednesday, EnCana announced a 50/50 joint venture with PetroChina to develop its Cutbank Ridge assets in the Montney. PetroChina will pay $5.4 billion for a 50% working interest in the play, which includes planned total infrastructure of 700 million cubic feet per day (mmcf/d) of gas processing capacity, 3,400 kilometers of pipeline, and the Hythe gas storage facility. PetroChinas interest

represents current production of 255 mmcfe/d, and 1 Tcfe of proven reserves over 635,000 net acres. EnCana will receive the full consideration upfront, with both companies equally sharing future development costs and operating responsibilities. PetroChina

Disclaimers & Disclosures No Morningstar employees are officers or directors of this company. Morningstar Inc. does not own more than 1% of the shares of this company. Analysts covering this company do not own its stock. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Morningstar Stock Data Sheet

Pricing data thru Jul. 29, 2011

Rating updated as of Jul. 29, 2011

Fiscal year-end: December

PetroChina Company, Ltd. PTR


PetroChina Company, Ltd. is an energy company controlled by the Chinese government, with operations consisting of exploration and production activities, refining and marketing of petroleum products, production and marketing of petrochemicals, and the transmission and storage of natural gas. With reserves of 22.2 billion barrels of oil equivalent (51% oil) and daily production of 3.3 million barrels of oil equivalent per day (70% oil), PetroChina is Chinas largest producer of oil and gas.
Morningstar Rating

Sales CNY Mil Mkt Cap USD Mil Industry

Sector

241,451
Last Price Fair Value

260,311
Uncertainty

Oil & Gas Integrated


Economic Moat
TM

Energy
Stewardship Grade

QQQQ
23.60 15.75

142.23

183.00

High

Narrow

. per share prices in USD


Annual Price High Low Recent Splits

22.48 17.90

58.20 19.10

63.70 41.28

95.65 142.60 266.81 182.97 135.92 136.50 158.83 51.00 82.46 108.20 56.30 63.94 99.02 129.26

Price Volatility
149.0 49.0 19.0

Monthly High/Low Rel Strength to S&P 500 52 week High/Low 158.83 - 106.72 10 Year High/Low 266.81 - 15.75 Bear-Market Rank 2 (10=worst) Trading Volume Million

9 Dongzhimen North Street Beijing, China 100011 Phone: 86 1084886270 Website: http://www.petrochina.com.cn

7.0 2.0 1.0 0.5

Growth Rates Compound Annual


Grade: B 1 Yr 3 Yr 5 Yr 10 Yr

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

Stock Performance Total Return % +/- Market +/- Industry Dividend Yield % Market Cap USD Mil
Financials

Revenue % Operating Income % Earnings/Share % Dividends % Book Value/Share % Stock Total Return % +/- Industry +/- Market Profitability Analysis
Grade: C

43.8 30.9 35.7 6.5 10.8 28.3 1.5 0.2


Current

20.6 -2.0 -2.1 -10.4 8.6 4.8 5.3 3.7


5 Yr Avg

21.6 -0.5 0.3 -3.2 12.3 7.4 3.0 6.6


Ind

19.7 8.2 9.0 15.9 12.7 24.3 14.2 23.6


Mkt

18.3 31.3 25.1 10.0 31297


2001

19.6 194.4 43.0 168.0 28.0 159.7 6.0 3.6 35288 100308
2002 2003

-1.8 59.6 77.6 28.0 -47.0 37.7 13.7 10.1 -10.8 56.6 64.0 24.5 -8.5 14.3 0.9 7.3 -24.2 34.2 46.2 -1.8 -11.8 18.2 7.7 3.3 4.4 4.5 3.4 2.7 4.4 3.0 2.9 3.3 94400 144105 252026 321147 162852 217722 240654 260311
2004 2005 2006 2007 2008 2009 2010 TTM

28856 58.9 8723 30.2 5654 3.26 1.79 1758 20.14 10206 -6175 4032
2001

29520 60.7 8737 29.6 5665 3.26 1.21 1758 21.75 11877 -8538 3339
2002

36695 60.2 11981 32.7 8409 4.83 2.04 1758 24.50

46946 61.3 17708 37.7 12434 7.13 2.36 1758 29.21

67370 60.9 23444 34.8 16270 9.15 3.72 1790 36.32

86319 109622 153416 149255 216484 241451 57.9 53.1 47.5 51.7 45.7 44.5 24804 26236 22816 21005 27740 29777 28.7 23.9 14.9 14.1 12.8 12.3 17819 9.91 4.79 1790 41.95 19117 10.63 4.74 1830 54.86 16390 9.02 3.89 1830 63.34 15139 8.20 3.57 1830 67.81 20681 11.23 3.83 1830 77.85 21908 . 3.93 . 82.85

Revenue CNY Mil Gross Margin % Oper Income CNY Mil Operating Margin % Net Income CNY Mil Earnings Per Share CNY Dividends CNY Shares Mil Book Value Per Share CNY Oper Cash Flow CNY Mil Cap Spending CNY Mil Free Cash Flow CNY Mil
Profitability

Return on Equity % 15.6 Return on Assets % 8.7 Fixed Asset Turns 1.4 Inventory Turns 6.3 Revenue/Employee CNY K 436.9 Gross Margin % Operating Margin % Net Margin % Free Cash Flow/Rev % R&D/Rev % Financial Position
Grade: B

18.2 11.9 1.2 5.3 337.4 * 51.2 18.9 13.7 . .

15.6 6.9 1.8 11.1 . 28.0 13.2 6.8 1.7 .

23.8 9.1 7.4 15.0 973.9 39.6 15.9 10.8 0.1 9.8

44.5 12.3 9.1 3.0 .

16768 16586 24873 24819 26747 24421 38361 45897 45803 -9798 -10926 -14740 -16508 -22978 -30853 -37716 -38279 -38434 6971 5660 10133 8311 3770 -6432 646 7618 7370
2003 2004 2005 2006 2007 2008 2009 2010 TTM

12-10 CNY Mil

03-11 CNY Mil

Cash Inventories Receivables Current Assets Fixed Assets Intangibles Total Assets Payables Short-Term Debt Current Liabilities Long-Term Debt Total Liabilities Total Equity Valuation Analysis
Current

6936 20470 7733 43461 187960 3863 251375 43977 15519 65213 20448 108891 142484
5 Yr Avg Ind

17562 24146 10583 62574 187063 4133 270396 10649 27957 80515 16396 121154 149241
Mkt

10.7 16.5 19.6 0.55 1.5


2001

10.1 15.4 19.2 0.53 1.5


2002

13.7 20.7 22.9 0.60 1.5


2003

18.0 26.3 26.5 0.68 1.4


2004

19.2 28.4 24.2 0.80 1.5


2005

17.2 25.8 20.6 0.83 1.5


2006

15.1 22.1 17.4 0.86 1.5


2007

10.2 15.0 10.7 0.95 1.5


2008

7.8 12.6 10.1 0.77 1.7


2009

9.0 15.7 9.6 0.94 1.8


2010

8.7 15.6 9.1 0.96 1.8


03-11

Return on Assets % Return on Equity % Net Margin % Asset Turnover Financial Leverage
Financial Health

-868 7039 35409 0.20


2001

-1714 7325 38246 0.19


2002

-3365 5069 43079 0.12


2003

-405 4646 51366 0.09


2004

2732 5522 63857 0.09


2005

-2261 4529 -5843 -13794 -21753 -17941 4561 5575 4811 12520 20448 16396 75095 100403 115908 124099 142484 149241 0.06 0.06 0.04 0.10 0.21 0.17
2006 2007 2008 2009 2010 TTM

Working Capital CNY Mil Long-Term Debt CNY Mil Total Equity CNY Mil Debt/Equity
Valuation

5.5 . 1.1 0.9 3.1

6.2 . 1.2 0.9 3.0

11.8 . 2.7 2.3 6.0

7.5 . 2.0 1.8 5.7

8.8 . 2.1 2.3 5.8

13.9 . 2.9 3.4 10.0

15.8 . 2.8 3.2 11.5

9.6 . 1.0 1.4 6.5

14.5 . 1.5 1.8 5.7

11.4 0.6 1.1 1.7 5.1

. . 1.1 1.7 5.5

Price/Earnings P/E vs. Market Price/Sales Price/Book Price/Cash Flow

Quarterly Results
Revenue CNY Mil Mar 10 Sep 10 Dec 10 Mar 11

Industry Peers by Market Cap


Mkt Cap USD Mil Rev CNY Mil P/E ROE%

Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales PEG Ratio

. 10.0 5.5 34.5 3.3 1.7 1.1 0.5

13.1 . 7.8 . . 2.3 1.9 .

10.8 . 6.8 41.8 2.5 1.7 0.8 .

14.8 13.2 8.4 17.4 1.9 2.0 1.3 1.5

Most Recent Period Prior Year Period


Rev Growth %

. 53611.4 62423.7 67614.1 . 39201.3 49248.8 46699.2


Mar 10 Sep 10 Dec 10 Mar 11

PetroChina Company, Exxon Mobil Corporat BP Plc Major Fund Holders

260311 393052 143448

241451 . 406974 11.4 344417 7.2

15.6 26.4 20.8

Most Recent Period Prior Year Period


Earnings Per Share CNY

. .
Mar 10

36.8 -87.1
Sep 10

26.8 -77.4
Dec 10

44.8 -74.3
Mar 11

% of shares

Most Recent Period Prior Year Period

. .

2.80 2.49

. 1.76

3.03 2.64

. . .
TTM data based on rolling quarterly data if available; otherwise most recent annual data shown.

*3Yr Avg data is displayed in place of 5Yr Avg

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.

The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Morningstars Approach to Rating Stocks

Our Key Investing Concepts Economic Moat Rating Discounted Cash Flow Discount Rate Fair Value Uncertainty Margin of Safety Consider Buying/Consider Selling Stewardship Grades
TM

At Morningstar, we evaluate stocks as pieces of a business, not as pieces of paper. We think that purchasing shares of superior businesses at discounts to their intrinsic value and allowing them to compound their value over long periods of time is the surest way to create wealth in the stock market. We rate stocks 1 through 5 stars, with 5 the best and 1 the worst. Our star rating is based on our analysts estimate of how much a companys business is worth per share. Our analysts arrive at this "fair value estimate" by forecasting how much excess cash--or "free cash flow"--the firm will generate in the future, and then adjusting the total for timing and risk. Cash generated next year is worth more than cash generated several years down the road, and cash from a stable and consistently profitable business is worth more than cash from a cyclical or unsteady business. Stocks trading at meaningful discounts to our fair value estimates will receive high star ratings. For high-quality businesses, we require a smaller discount than for mediocre ones, for a simple reason: We have more confidence in our cash-flow forecasts for strong companies, and thus in our value estimates. If a stocks market price is significantly above our fair value estimate, it will receive a low star rating, no matter how wonderful we think the business is. Even the best company is a bad deal if an investor overpays for its shares. Our fair value estimates dont change very often, but market prices do. So, a stock may gain or lose stars based

just on movement in the share price. If we think a stocks fair value is $50, and the shares decline to $40 without much change in the value of the business, the star rating will go up. Our estimate of what the business is worth hasnt changed, but the shares are more attractive as an investment at $40 than they were at $50. Because we focus on the long-term value of businesses, rather than short-term movements in stock prices, at times we may appear out of step with the overall stock market. When stocks are high, relatively few will receive our highest rating of 5 stars. But when the market tumbles, many more will likely garner 5 stars. Although you might expect to see more 5-star stocks as the market rises, we find assets more attractive when theyre cheap. We calculate our star ratings nightly after the markets close, and issue them the following business day, which is why the rating date on our reports will always be the previous business day. We update the text of our reports as new information becomes available, usually about once or twice per quarter. That is why youll see two dates on every Morningstar stock report. Of course, we monitor market events and all of our stocks every business day, so our ratings always reflect our analysts current opinion.

Economic Moat Rating

TM

The Economic Moat Rating is our assessment of a firms ability to earn returns consistently above its cost of capital in the future, usually by virtue of some competitive advantage. Competition tends to drive down such

TM

Morningstar Research Methodology for Valuing Companies

Competitive Analysis

Economic TM Moat Rating

Company Valuation

Fair Value Estimate

Uncertainty Assessment

QQQQQ
Q QQ QQQ QQQQ QQQQQ
The current stock price relative to fair value, adjusted for uncertainty, determines the rating.

Analyst conducts company and industry research: Management interviews Conference calls Trade-show visits Competitor, supplier, distributor, and customer interviews

The depth of the firms competitive advantage is rated: None Narrow Wide

Analyst considers company financial statements and competitive position to forecast future cash flows. Assumptions are input into a discounted cash-flow model.

DCF model leads to the firms Fair Value Estimate, which anchors the rating framework.

An uncertainty assessment establishes the margin of safety required for the stock rating.

2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

Morningstars Approach to Rating Stocks (continued)

economic profits, but companies that can earn them for an extended time by creating a competitive advantage possess an Economic Moat. We see these companies as superior investments.

Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value required before a stock can earn 5 stars, and the greater the premium to fair value before a stock earns a 1-star rating.

Discounted Cash Flow

Margin of Safety

This is a method for valuing companies that involves projecting the amount of cash a business will generate in the future, subtracting the amount of cash that the company will need to reinvest in its business, and using the result to calculate the worth of the firm. We use this technique to value nearly all of the companies we cover.

This is the discount to fair value we would require before recommending a stock. We think its always prudent to buy stocks for less than theyre worth.The margin of safety is like an insurance policy that protects investors from bad news or overly optimistic fair value estimates. We require larger margins of safety for less predictable stocks, and smaller margins of safety for more predictable stocks.

Discount Rate

We use this number to adjust the value of our forecasted cash flows for the risk that they may not materialize. For a profitable company in a steady line of business, well use a lower discount rate, also known as "cost of capital," than for a firm in a cyclical business with fierce competition, since theres less risk clouding the firms future.

Consider Buying/Consider Selling

The consider buying price is the price at which a stock would be rated 5 stars, and thus the point at which we would consider the stock an extremely attractive purchase. Conversely, consider selling is the price at which a stock would have a 1 star rating, at which point wed consider the stock overvalued, with low expected returns relative to its risk.

Fair Value

This is the output of our discounted cash-flow valuation models, and is our per-share estimate of a companys intrinsic worth. We adjust our fair values for off-balance sheet liabilities or assets that a firm might have--for example, we deduct from a companys fair value if it has issued a lot of stock options or has an under-funded pension plan. Our fair value estimate differs from a "target price" in two ways. First, its an estimate of what the business is worth, whereas a price target typically reflects what other investors may pay for the stock. Second, its a long-term estimate, whereas price targets generally focus on the next two to 12 months.

Stewardship Grades

We evaluate the commitment to shareholders demonstrated by each firms board and management team by assessing transparency, shareholder friendliness, incentives, and ownership. We aim to identify firms that provide investors with insufficient or potentially misleading financial information, seek to limit the power of minority shareholders, allow management to abuse its position, or which have management incentives that are not aligned with the interests of long-term shareholders. The grades are assigned on an absolute scale--not relative to peers--and can be interpreted as follows: A means "Excellent," B means "Good," C means "Fair," D means "Poor," and F means "Very Poor."

Uncertainty

To generate the Morningstar Uncertainty Rating, analysts consider factors such as sales predictability, operating leverage, and financial leverage. Analysts then classify their ability to bound the fair value estimate for the stock into one of several uncertainty levels: Low, Medium, High,
2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.