Stock of the Day
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PetroChina Co. Ltd. (PTR)
Searching for Black Gold in the South China Sea
PetroChina Company, one of the leading Asian firms in the oil and gas industry, is looking forward to a bright future. The firm, which competes against old stalwarts such as ExxonMobil, ConocoPhillips and BP, as well as with a handful of Chinese competitors, has seen explosive growth since its establishment in 1999, with a three-year total return of 340% and a share price growth of 297%. With PTR financial figures pointing to anything but a slow down, what is over the horizon (or under the sea in an oil vein) for a firm located in the heart of the complicated Chinese market?
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World consumption of oil and natural gas products has rapidly increased over the course of the last 30 years, and is not expected to slow down any time soon. Currently, the United States and China are on track to being the largest global consumers of petroleum products, and when one considers that over one billion people live in China, one can only expect the potential price levels of oil in the coming years to go through the roof. What does this spell for oil companies like PTR? To get a good idea of what PTR's Chairman, Geng Chen, is envisioning, think of Scrooge McDuck swimming in a giant pool of gold coins. The possibilities for profit are great, which is why global jockeying for control of oil reserves will only get more heated. PetroChina must hurry and seize as much territory as it can in order to preserve any hope of long-term profitability. With onshore supply remaining relatively stagnant, PTR must venture into the competitive waters of the South China Sea for exploration and production licenses.
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Currently, the company boasts roughly 11 billion barrels of crude oil (worth $700bn at $64/barrel) and approximately 44,553.6 billion cubic feet of natural gas. While this seems huge now, one must consider that global oil consumption will average 83.48 million barrels a day this year alone. That's approximately 31 billion barrels a year. PTR would have to find new sources; otherwise it would not be able to cover more than four months of consumption (by itself). While no one would ever expect PetroChina to supply the world's oil by itself, this does put things in perspective.
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While PTR has experienced explosive growth during the last six years, what portion of that can be attributed to China's policy toward competition and privatization? Yes, the firm has global competitors for a scarce resource, but with huge internal economic growth mostly unavailable to Westerners, what sort of effects should the company expect as China continues to open its borders? State-controlled firms still make up roughly 30% of the Chinese economy, and states are not very willing to risk jobs to foreign firms simply for the sake of increased competition. The Organization for Economic Co-operation and Development (OECD) expects privatization to continue to increase, which is seen in the rapidly increasing productivity and efficiency ratings of Chinese firms (15% in 2003, beating the OECD average of 11%). This probably won't hurt PTR too much, since oil companies are very capital-intensive, which provides a barrier to entry that might limit new competitors; however, Western oil companies venturing into offshore production partnerships with CNOOC and Sinopec is a very real threat.
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How PTR deals with other Asian firms like China National Offshore Oil Corp. and Sinopec Corp. will be a determining factor in the company's future. PTR and SHI are China's two largest oil players, but CNOOC is currently the largest offshore producer. China National will certainly dominate the short-term, in the case that PTR expands into off shore production, since capital and risk expenditures for offshore exploration is much steeper than that of onshore drilling (roughly five to six times higher costs). As of summer 2004, almost all of China's offshore drilling was undertaken by CNOOC and its foreign partners, prompting the Chinese government to encourage domestic oil companies to venture offshore to increase oil supply and decrease reliance on imports. Essentially, the South China Sea region is too big for one firm, and CNOOC has a limited reach into the region as of now.
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Another question is whether PTR and other Chinese firms will hit their limit of physical and human capital any time soon, which will require changes in technology (which is quite expensive) that other Western nations now rely on. Since 1980, the Asian region has experienced rapid increases in economic factors: years of schooling (approx. 200%), output per worker (approx. 200%), capital per worker (approx. 300%) and human capital (approx. 50%). Asia is one of only three regions in which total factor productivity increased, along with Western countries and newly industrialized areas like Hong Kong and Japan. As long as China's productivity and GDP continue to clip along at the current pace, PTR will continue to be a major player in one of the fastest growing global economies. Couple this with a PEG of .84 (less than 1.0 is considered a discount), projected long-term EPS growth of 10% and a dividend yield of 4.65%, this stock might be a good edition to any international portfolio.
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Profile |
Explorer, developer, and producer of crude oil and natural gas. The Company also refines, transports, and distributes crude oil and petroleum products, produces and sells chemicals, and transmits, markets and sells natural gas.
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