January 14, 2002; PetroChina Finalizing Partner Selection for Natural Gas Development 

Though taking at least six months longer than once contemplated the partners may soon be in place to build the backbone of China's natural gas infrastructure.  The project ranks in history with the building of the U.S. natural gas pipeline grid and the European pipeline grid.  Their position in European natural gas may have been the single most important contributor to the continued preeminent rank of Exxon and Royal Dutch/Shell in the world energy industry. 

Thus, logically, ExxonMobil and RD ought to be interested in investing in China natural gas.  Indeed it appears in recent days that RD has been selected as a major partner.  At the same time it seems that XOM will have a role as well.  Estimated to cost $15 billion or more the west to east pipeline and related projects need well-capitalized participants.

Skeptics question whether consumers will be willing to pay a price that justifies the investment in natural gas.  Where the competition is dirty fuel, there should be little debate.  The more value one puts on a clean environment, the more justifiable the pipeline project becomes.  Nonetheless initial capital outlays are huge.  The Chinese government must, and likely will, in our opinion assure that the project is successful.

Without putting much value on the long term natural gas potential, PTR is an attractively valued stock at a McDep Ratio of 0.71 and an EV/Ebitda multiple of 3.8 times.  A dividend yield of 9.9 percent may help while investors await the payoff from prospective large commitments to long-term natural gas development.

From the viewpoint of a diversified portfolio, investors in XOM and RD will have a participation in China natural gas through XOM and RD stock.  Presumably the three partners would participate on a comparable economic basis with perhaps an edge to the host company.  Because PTR stock is valued at less than half the EV/Ebitda multiple of its partners, investors get participation in China natural gas on more favorable terms through PTR stock than through XOM and RD stock. 

From a risk point of view investors in the China natural gas project through XOM and RD would enjoy the diversification of all the holdings of XOM and RD.  Investors in China natural gas through PTR would diversify their risk by owning other oil and gas stocks. 

Go to www.mcdep.com for our historical research on PTR.  Click on Stock Ideas.  Click on PTR.  Select from a list of hyperlinks to references.