At the bottom of a U-shape
recovery
We believe the crude oil market is close to its cycle
bottom at US$40 a barrel, and is pending a Ushape
recovery at the end of this year. The
sector’s P/B has reached an attractively low level,
hence further downside should be limited. As risk
/ reward balance is already appealing for longterm
investors, we upgrade CNOOC from Hold to
Buy.
Bad news flow will continue in 2Q09. Given the
weaker global economic growth, we expect further
negative news flow to overshadow the crude oil market
until the end of 2009. Negative news will be mainly on
corporate earnings, stemming from the contracted
market demand, adverse effects from lower crude price
to profit margins, as well as impairment loss on highcost
inventory for the next quarter.
Sector’s value is close to bottom. However, we
believe the crude price should find strong fundamental
support at US$40 a barrel, which we deem as a cycletrough
price versus average cost of production at
US$27, to motivate sizeable cut in oil output, stimulate
government’s incentive to build strategic oil inventory
and induce market speculation on gold / oil arbitrage.
We believe the current sector’s P/BV should already
provide an attractive risk / reward balance for long-term
investors to accumulate the three oil majors in China.
Upgrade CNOOC to Buy. We maintain Neutral rating
for the sector due to anticipation of further negative
news until the end of result season. While the corporate
earnings risk should be largely priced in, we should see
a bottom-fishing opportunity after the result season.
We Upgrade CNOOC from Hold to Buy, as it is a good
investment proxy on our belief that crude price will
bottom out in 2H09. We maintain Buy on Petrochina,
given its balanced up-and-down stream operations and
solid long-term fundamentals.

Industry Focus
Oil & Gas Sector
Page 2
Table of Contents
Investment Summary 3
Gloomy near-term demand outlook 4
OPEC production cut will alleviate over-supply risk 7
Catalysts from speculation 8
Brent target is cut to US$50 in 2009 9
But, crude price is close to cycle bottom at US$40 10
E&P profit will fall to lowest level since 2004 12
Chemical segment has started the loss cycle 14
Turnaround in refining to offset the profit pressure 16
Earnings forecast 18
Sensitivity of oil price to earnings forecast 20
Sector performance and valuation 21
Stock Picks 23
CNOOC 27
PetroChina 31
Sinopec Corporation 35