The initial public offering of PetroChina Co. Ltd., led to market by Goldman Sachs & Co., didn't exactly debut to stellar reviews on Wall Street. But the outlook for the stock is promising, say a pair of energy market seers. PetroChina's American Depositary units, which trade on the NYSE as PTR, were offered in early April at about $16.44, and raised $3.1 billion. Its parent is China National Petroleum Corp.-China's state-owned oil and gas company. "As the Chinese economy opens up, the country plans to privatize its industries, so this is going to be a year of a lot of IPO activity in China-PetroChina being the flagship offering," says Frederick P. Leuffer, New York-based senior managing director and senior energy analyst for Bear Stearns & Co., one of the comanagers of the PTR offering. Why the cool market reception to the PetroChina IPO? "Early April was a tough time to bring a major oil company public, let alone a company that has all of its operations in a developing country," says Leuffer. "Also, there's a lack of operating history with the company, and specific country risk. However, PetroChina plans to cut costs substantially and improve returns. If it's successful in doing that, then investor interest in this issue will pick up." The fully integrated oil company's proved reserves total nearly 15 billion equivalent barrels of oil-making it fourth in reserves among all publicly traded oil companies. Meanwhile, it produces in excess of 2 million barrels of oil per day-a sum equal to its daily refining capacity. Leuffer says PetroChina has four attractive opportunities for growth. The first is expansion of natural gas sales. "During the next four to five years, its natural gas production will more than double as gas demand in China grows at an estimated 8% to 10% annually." In line with this, PetroChina is constructing two major gas pipeline networks, and has already signed joint-venture contracts with BP Amoco and Shell for their participation in these projects, according to Leuffer. In addition, Enron has indicated that it wants to participate. At the time of the IPO, BP Amoco took 20% of the PetroChina offering, giving it a 2% stake in the company. The rationale? "PetroChina dominates the oil and gas industry in onshore China and BP Amoco wanted to align itself with the partner of choice in that country," says Leuffer. PetroChina's second opportunity: management plans to cut $1.1 billion in costs during the next three years. "Already, the company has begun to bring its lifting costs down, from $5.05 per equivalent barrel in 1998 to $4.76 last year, and we think it can lower those costs much further." The third opportunity is growth in retail petroleum-product sales. There are three major petroleum marketers in China, and PetroChina currently has only an 8% market share. During the next five years, PetroChina plans to add several thousand service stations-this on top of the 1,000 gas stations it added last year and another 1,000 it added in first-quarter 2000. By 2005, the company should have 8,000 to 9,000 service stations throughout China, with a focus on the fast-growing southern region of the country. The fourth opportunity is improved capital management. In 1998, the company's return on capital employed was 5%. "PetroChina is now focused on much higher returns-in the range of 10% to 12%-which is competitive with those of the major international oils. And as it moves more natural gas to market at higher prices, continues to cut costs, grows the retail side of its business, and manages for profit, the company should achieve those returns." Scott A. Lewis, associate, energy investment banking, for Merrill Lynch & Co. in Houston, agrees that, while there is country risk associated with PetroChina, its longer-term story is a play on improving gas markets in China. "Currently, more than 70% of China's energy consumption is coal-based; only 2%, natural-gas-based. If PetroChina can develop the infrastructure to get its gas to market-and it controls 70% of the country's gas reserves-then its growth prospects look good." While Merrill Lynch did not participate in the PetroChina IPO, it plans later this year, or in early 2001, to jointly lead with Salomon Smith Barney an IPO for China National Offshore Oil Co. (CNOOC). That entity's exploration and production area covers some 780,000 square kilometers (483,600 square miles) offshore China, primarily in Bohai Bay and the western part of the South China Sea. "Unlike China's two other major oil and gas companies-PetroChina and Sinopec-all of CNOOC's reserves are offshore and closer to the country's major population centers," says Lewis. "So it doesn't face the same infrastructure issues, in terms of getting gas to market. Also, more than 70% of its reserves are proved undeveloped, hence it should exhibit significant annual production growth-15% to 20%-during the next couple of years." Adds Lewis, "Of the three major China oil and gas companies, CNOOC is the most western, in terms of its management and operations." -Brian A. Toal