PetroChina (PTR)
has been the sweetest of China plays for global investors in recent
years. Warren Buffett started investing in the mainland''s biggest oil
producer back in 2003, and the company''s shares appreciated more than
sevenfold from that point until last November. Last fall, when
PetroChina listed in Shanghai, it enjoyed a surreal market
capitalization of just over $1 trillion, a figure roughly equal to the
economic output of India and $600 billion more than the value of
ExxonMobil (XOM) shares.
These days the mood is likely far more subdued at PetroChina''s Beijing
headquarters. It''s a primary target of a divestiture push by human
rights groups. They are outraged by the investments of PetroChina
parent China National Petroleum Corp. (CNPC) in Sudan, which has drawn
international criticism over atrocities in the war-torn province of
Darfur. And PetroChina''s shares on the Shanghai and Hong Kong stock
exchanges have fallen 40%-plus over the last four months, thanks in
part to a slower earnings outlook. (Weep not for Buffett: He sold off
his estimated 2.3 billion shares, or 1.3% stake, in the company last
October and made a killing.)
EARNINGS PRESSURE
PetroChina still boasts plenty of strengths: It has global scale and
$105 billion in annual revenues, and it drills for crude and refines
gasoline and other products in a hypergrowth, domestic economy. Yet
it''s now caught in a painful squeeze. It must pay around $100 per
barrel in international oil markets for imports to offset its declining
production at home.
At the same time, PetroChina is under government orders to subsidize
domestic fuel prices for consumers. Gas and diesel "prices in China
reflect $60 a barrel for oil, not $100 a barrel," says Hernan Ladeuix,
head of oil and gas research for CLSA Asia- Pacific Markets in
Singapore. (PetroChina executives declined to comment for this story.)
Nor is Chinese President Hu Jintao''s government likely to cut much
slack for PetroChina. Consumer price inflation on the mainland hit an
alarming 7.1% annual pace in January. Beijing officialdom fears social
instability among lower-income Chinese above all and won''t let domestic
oil companies push through price increases.
True, PetroChina rakes in profits on the oil it produces abroad and
then sells in global markets. But two years ago Beijing slapped on a
windfall profit tax that generates $8 billion in government revenues
used to subsidize energy-hungry Chinese industries. In March, China''s
legislative body, the National People''s Congress, may hike other taxes
related to oil production. Beijing "thinks it''s good to take money from
the very rich oil companies to help more vulnerable parts of the
economy," says K.F. Yan, a Beijing-based analyst at Cambridge Energy
Research Associates.
At the same time, PetroChina is coping with declining production at
its aging domestic oil fields in the northeastern city of Daqing. Crude
output grew only 0.9% in 2006, to 830.7 million barrels, while in the
first half of last year it inched up 0.1% year-on-year. PetroChina did
announce a major find along the tidal waters near the northern city of
Tianjin that the company expects will eventually provide some 200,000
barrels a year. Still, Morgan Stanley (MS),
which forecasts PetroChina''s 2007 net profit to come in at about $22
billion, is predicting profit growth this year of only 4.5%. Back in
2006, earnings rose 6.6%.
The hunt for more oil has prompted PetroChina (and parent CNPC) to
explore energy sources in Kazakhstan, Sudan, and Venezuela. But in
Sudan''s case, it also has put the company in hot water with human
rights groups. "Absent China and PetroChina''s involvement, it might be
easier to bring sanctions against the Sudanese government," says Sophie
Richardson, Asia advocacy director with New York-based Human Rights
Watch.
Another risk: In a politically unstable country such as Sudan there
is always the possibility of an abrupt change in government and the
seizure of foreign oil assets. PetroChina, like other global oil
companies, faces risks such as "nationalization, rising taxation, and
changing contract structures," says Xu Xiaojie, director of the
Institute of Overseas Investment at CNPC''s Research Academy of
Economics & Technology.
The outlook for PetroChina in the far more stable natural gas
business appears bright. The company already operates the country''s
transnational gas pipeline from the western region of Xinjiang to
power-hungry Shanghai. On Feb. 22, PetroChina began building a second
extension that will run to Guangzhou. It also has teamed up with
Chevron (CVX) to produce natural gas in Sichuan province.
Yet until PetroChina can close the gap between the high price of oil it
buys abroad and the subsidized prices at which it must sell it at home,
its earnings and stock price will remain under pressure. Savvy investor
Buffett appears to have timed his departure last fall just about right.
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