PetroChina (PTR: Charts, News, Offers), the second largest energy company in the world, made headlines this week with its $5.4 billion acquisition of Canadian energy company Encana’s (ECA: Charts, News, Offers) natural gas resources, in a purchase which mirrors Chevron (CVX: Charts, News, Offers) and ExxonMobil’s (XOM: Charts, News, Offers) respective purchases of natural gas companies Atlas Energy and XTO Energy. The Chinese oil giant has long been regarded as a value play on the increasing demand for energy in the second largest economy in the world, but has also been a controversial choice for Western investors, as the company has been accused of war profiteering in Darfur. PetroChina is currently the most profitable company in Asia, being the first in the region to reach the trillion dollar market capitalization. With analysts forecasting crude oil returning to 2008 highs of $147 a barrel, is PetroChina, which trades with a forward P/E of 10.95, a solid bet on both Chinese growth and rising energy prices?
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PetroChina’s business is divided in five segments – Exploration and Production, Refining and Chemicals, Marketing, Natural Gas and Pipeline. The company is a subsidiary of the government-owned China Petroleum National Corporation, which has interests in Iraq, Syria, Kazakhstan, Uzbekistan and Xinjiang. These properties are all linked together to the Chinese mainland by the Xinjiang pipeline, which connects the Middle East to China. The company has no exposure to the troubled regions of Egypt and Libya, as well as the rumored “next domino” Saudi Arabia – the heart of the North American oil giants. PetroChina’s insulation from global troubles stems from a more positive relationship between the company and vehemently anti-American regimes. The company has more clout that its foreign competitors due to its backing by the Chinese government, of which PetroChina is merely a public extension. In fact, CEO Jiang Jiemin is head of both PetroChina and the CPNC.
Jiang is hardly worried about the sustainability of crude oil prices. He claims that a range of $95-$100 would be acceptable for both producing and developing nations. “Oil prices are already high, and should not gain much further in the near term if there is no serious new crisis in the Middle East and North Africa,” stated Jiang, “and oil prices should fall after the crisis.” With the unpredictability of oil prices, his company has been hedging its bets with natural gas and oil sands investments overseas. PetroChina’s purchase of Encana’s Cutbank Ridge shale gas assets on the border of Alberta and British Columbia is a sign of the times, with an Asian company drilling in North America. Natural gas prices have currently been low with long-term upside as supplies deplete, which explains ExxonMobil and Chevron’s current natural gas strategies. In addition, PetroChina has offered $1.015 billion USD for a 50% share of the European refining operations of U.K.’s INEOS Group, which would grant it refineries in Grangemouth in Scotland and Lavera in France.
PetroChina’s upstream operations came in strong last quarter, offsetting losses incurred by its refineries. In 2011, the company’s oil production is expected to rise to two million tonnes, and natural gas production is forecast to increase by 5-10%. Its overseas fields are expected to generate a record two million barrels per day in 2011, a 15% increase over the 1.73 million barrels per day it posted in 2010, which was already a 14% increase over the previous year. Low domestic prices on imported gas to Turkmenistan hurt the company’s bottom line, a loss which may be subsidized by the Chinese government. China and Turkmenistan expect to generate 17 billion cubic meters of gas in 2011, a four fold increase from the 4 billion it generated last year.
In addition to strong growth potential, PetroChina’s dividends have yielded an average of 4.22%. With a mere 1% institutional ownership, big money could move the stock if its investments in potentially volatile regions pays off.
Other News About PTR
Encana Deal With PetroChina Highlights Undervaluation
Analysts now believe that PetroChina’s Encana acquisition adds untold value.
China’s Logical Acquisition of Natural Gas in Canada
Details regarding PetroChina’s first steps into North America.
Other Stocks in the News
Judge refuses to order additional Exxon Valdez payment
Judge rules in favor of Exxon, no additional payments to be made to Alaska.
Louisiana Sues BP, Partners for $1 Million a Day Over Spill
BP isn’t out of the oily water yet in the Gulf.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
