The stocks of Chinese majors PetroChina and China Petroleum and Chemical Corporation (Sinopec) fell significantly last month from their late December peaks. The causes: A deadly explosion at a gas facility owned by PetroChina parent China National Petroleum Corp (CNPC), resurgence of SARS and the chicken flu and BP’s decision to sell off its 2% stake in PetroChina, sparking speculation it might also dump its 2.2% holdings of Sinopec.

Speculators joined profit takers to take both stocks down in the run-up to the Lunar New Year on January 22. PetroChina closed at HK$4.075 on January 20 while Sinopec closed at HK$3.475 on the Hong Kong Stock Exchange. (US$1=HK$7.78).

Despite the setbacks, analysts at HSBC, CSLA, Smith Barney and ING affirmed the stocks as long-term plays.

PetroChina: In early January, HSBC downgraded PetroChina from ‘buy’ to ‘add’ following the gas explosion in Chongqing, which killed more than 240 people. HSBC analyst Gordon Kwan said that “unsettling repercussions” from that explosion would provide a window for some profit-taking. However, he stressed that “we believe that PetroChina is still undervalued.”

According to Mr Kwan, PetroChina’s near-term prospects would be limited as state authorities are looking to file charges against PetroChina parent CNPC over safety regulations and there is the potential for lengthy lawsuits for negligence. Chongqing police have arrested three low-level PetroChina employees for breaching safety regulations, and later CNPC announced that vice-president Wu Yaowen had retired although some mainland media said he had been fired over the incident.

There were also reports, later denied, that senior PetroChina managers had been sacked.

Some of PetroChina’s projects may now be delayed or cancelled, which could result in higher operating cost for the company. Still, PetroChina has a large cash reserve and will be able to handle the financial consequences of the tragedy, Mr Kwan said.

He has set a target price for the stock at HK$5.00/share, but a renewed surge in oil prices and the outcome of OPEC’s February 10 meeting in Algiers could prompt a re-rating.

As the market was digesting the implications of the tragedy, UK major BP announced it had sold off its 2% stake in PetroChina at HK$3.70/share. That sale, which netted BP a huge profit cast renewed doubts over PetroChina’s prospects.

But analysts at Credit Lyonnais Securities Asia (CLSA), ING Financial Markets and Smith Barney all came out saying that the sale does not reflect negatively on PetroChina or would affect its future operations.

Rather, according to CLSA analyst, Erwin Sanft BP’s disposal was part of its strategy to cash in on its minority stakeholdings. BP took the stake to support PetroChina’s initial public offering (IPO) four years ago and helped build up a working relationship with the Chinese major.

Mr Sanft said BP may now also dispose of its 2.2% stake in Sinopec and western oil giants ExxonMobil and Shell could follow BP in selling of their stakes in Sinopec.

CLSA rates PetroChina a ‘buy’ with a 12-month target price of HK$4.75.

Details in the February 2004 issue of EnergyAsia Report.