A New Era of Energy Security: Re-evaluating China's "Three Oil Giants"?
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Against the backdrop of global geopolitics elevating the importance of energy security, Morgan Stanley believes the strategic value of China’s three major oil companies (“the three barrels of oil”) is becoming increasingly prominent.
According to Chasing Wind Trading Desk, Morgan Stanley analysts including Jack Lu released their latest report, noting that geopolitical tensions and supply chain reshaping mean that China’s “domestic upstream producers and energy import assets connected to pipelines should benefit from a security-driven revaluation.”
Although freight inflation poses some constraints on downstream operators’ margin expansion, overall earnings still have upside potential. The bank’s re-evaluation of the core macro foundation of the “three barrels of oil” is based on the rise in the median crude oil price. The report explicitly states: “We are optimistic about these three oil giants.”
PetroChina: Local Energy-Security Champion
Among the three oil companies, Morgan Stanley gives high praise to the strategic position of PetroChina, calling it the “local energy-security champion.”
The research report points out: “PetroChina stands out as the primary beneficiary of structurally enhanced energy security value. The company controls over 80% of China’s domestic proven oil and natural gas reserves.”
Regarding its business model’s transformation, the report states: “In the past three years, PetroChina has significantly shifted its positioning from a ‘national service’ role to an industry champion, evolving in the local natural gas market from a price taker to an effective price setter.”
To reflect this strategic upgrade, Morgan Stanley substantially raised the target P/E multiple for PetroChina’s oil Exploration & Production (E&P) business from 2x to 4x, “to reflect the rising value of energy security.”
Based on the SOTP (sum-of-the-parts) valuation method, Morgan Stanley raised the target price of PetroChina H-shares by 29% to HK$13.25 and A-shares by 29% to RMB 14.70.
Morgan Stanley notes: “While geopolitical tensions related to Iran may ease over time, we believe that the market’s renewed focus on energy security should continue as part of a broader de-risking framework, thereby supporting PetroChina’s strategic value and earnings durability.”
Sinopec: Upstream “Pure Play”
For Sinopec, Morgan Stanley defines it as the “upstream ‘pure play’ most sensitive to oil prices.”
Sinopec’s earnings last year mainly came from upstream, with a flat performance downstream, making it the most sensitive to oil prices among the three oil companies.
Freight inflation triggered by geopolitical factors is challenging refineries. The report notes: “Freight inflation could compress refining margins by about $3/barrel relative to 2025 levels.” However, Morgan Stanley also emphasizes that this pressure will be fully offset by other factors: “Inventory gains could contribute about $2/barrel, while RMB appreciation may further add a tailwind of roughly $1/barrel.”
Moreover, Morgan Stanley believes there is even upside potential in Sinopec’s downstream business: “If supply constraints persist… China’s domestic fuel and chemical markets may shift from structurally oversupplied to undersupplied, supporting stronger margins and tilting Sinopec’s downstream profits to the upside.”
Therefore, Morgan Stanley raised Sinopec’s H-share target price by 9% to HK$6.98, and A-share target price by 33% to RMB 8.00.
CNOOC: Cost Advantage and Output Growth
For CNOOC, Morgan Stanley’s bullish logic centers on its outstanding cost control and production growth. The report sees CNOOC as having “the best cost structure and the highest output growth among its peers.”
To align with PetroChina and Sinopec in trends with Brent crude oil prices, Morgan Stanley also raised its oil price forecast for CNOOC. It anticipates that CNOOC will continue to outperform its peers in cost. The low-cost strategy and strong execution track record should enable CNOOC to be well positioned to fully benefit from high oil prices.
Morgan Stanley raised CNOOC’s 2026 earnings forecast by 25% and 2027 by 13%. Based on the new forecast, Morgan Stanley raised CNOOC’s target price by 64% to HK$28.90.
Morgan Stanley notes: “The company’s commitment to a payout ratio of no less than 45% for 2025-27 may reflect management’s confidence in constructive oil prices and company profitability.”
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