Macro Tsimmis

intelligently hedged investment

BUY PetroChina (PTR)—all roads lead to Beijing

Posted by intelledgement on Tue, 23 Jan 07

PTR = E * C²

…that is, PetroChina (PTR) equals energy (because it is an integrated energy company) times China squared (both because it is a Chinese company and because it is majority-owned by the Chinese government, and therefore doubly unlikely to lose).

PTR was f0rmed in 1999 as a result of the restructuring of the old Chinese National Petroleum Corporation (CNPC). PTR got most of the domestic (internal to China) assets, including the lion’s share of the oil and natural gas reserves. So far at least, PTR has minimal direct exposure to international geopolitical risks, aside from some purchase contracts. When you hear about China getting involved with the national oil companies of Venezuela, Iran, and others—not that these days this is such a risky proposition if you are China—that is most likely a Sinopec (SNP) operation (they inherited the CNPC foreign operations). So long as energy demand in China keeps growing and their reserves hold out—in both cases, likely to be years and years—PTR has a huge opportunity to profit.

Of course, the opportunity will not be realized as fully as it could be. PTR is controlled by the Chinese government and they have an interest in maintaining cheap access to energy to sustain growth. So while on the one hand, PTR’s access to the best energy market going forward is guaranteed, on the other hand, profits here will likely not be as good as they could be.

Plus there are some valuation issues. China is a great market and 11B BBLS of reserves ain’t hay…but Exxon’s (XOM) annual profit is bigger than PTR’s revenues…so it is a little unsettling to see PTR with a market cap of better than half the size of XOM when their revenues are more like a third of Exxon’s and their profits are about a quarter of Exxon’s.

But bottom line, this is China, the fastest growing market in the history of humankind and we are talking about a seller of energy in the ultimate seller’s market…and speaking of sellers’ markets, the demand for PTR stock—own a piece of China’s growth!—is stronger than it probably “should” be, and buying it here we figure to benefit from that…so we are gritting our teeth and bearing the rich valuation. Odds are good it will get richer…and thus so will we.


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