Crude Awakening

Goldman Sachs $GS ( ▲ 1.29% ) Asia Pacific energy analysts rate Chinese gas companies PetroChina (PCCYF) and CNOOC as Buys, citing the potential for meaningful free cash flow gains as oil prices climb.

In a March 2 report, the Goldman team said that even with Brent crude at $80 to $90 a barrel, the full-year free cash flow of both companies could be boosted by more than 10%.

When that note was published, the firm was pricing in an average Brent of $70 a barrel. Brent has since traded well above $100.

The bullish case rests on upstream exposure.

Both PetroChina and CNOOC are primarily oil exploration and production businesses, meaning they capture the full benefit of higher crude prices.

Goldman is notably less enthusiastic about Sinopec, China's largest refiner. A domestic pricing ceiling mechanism that does not factor in higher international freight rates or official selling prices skews the net impact negative for refiners.

The Iran war has disrupted about 20% of global petroleum flow through the Strait of Hormuz, sending Brent up 28% last week, its biggest weekly gain since April 2020.

Goldman's broader thesis covers the Asia upstream group.

The firm notes that valuations for PetroChina, CNOOC, India's ONGC, and Thailand's PTTEP remain "relatively discounted" versus developed market peers, including ConocoPhillips $COP ( ▼ 0.03% ), BP $BP ( ▲ 0.52% ), Chevron $CVX ( ▼ 0.26% ), and Exxon Mobil $XOM ( ▼ 0.51% ), even after the recent rally.

For US investors, Treasury restrictions have barred purchases of CNOOC shares since 2021. PetroChina carries no such restriction and is accessible via international broker or through the iShares MSCI China ETF $MCHI ( ▲ 1.68% ).