An Energy Play On China's Growth

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

PetroChina (NYSE: PTR) is the largest oil and gas producer in China, and with over $300 billion in revenues annually, is one of the largest companies in the world of any kind.  With shares still just worth less than half of what they were worth at the 2007 peak, is this the right time to get in?

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PetroChina’s revenue growth has certainly reflected the overall growth of China’s economy, particularly in the middle class.  As more ordinary citizens earn disposable income, the number of cars on the road will increase dramatically, similar to what happened in America after the Model T was introduced.

About PetroChina

PetroChina engages in virtually all aspects of the production and sale of oil and gas in the People’s Republic of China (PRC).  The company is largely controlled by the government, with 87% of its shares owned by the state-run China National Petroleum Corp. 

The company holds exploration and exploitation licenses for oil and gas covering about 458 million acres, mostly in northeastern, northern, southwestern, and northwestern China.  Proved reserves are over 11 billion barrels of crude oil and over 66 billion cubic feet of gas. 

On the refining side of the business, PetroChina operates 29 separate refineries and chemical plants, where the company produces petrochemical and derivative products.  The company markets its refined products through its vast distribution network, which includes over 19,000 service stations and a number of independent distributors, as well as over 36,000 kilometers of natural gas pipeline.

Growth and Valuation

PetroChina is expected to earn $10.64 per share for this year, meaning that it trades at a P/E ratio of 12.4 times current year earnings, which are expected to increase to $12.42 and $13.67 over the next two years, for forward annual earnings growth of 16.7% and 10%, respectively, which more than justifies the multiple. Additionally, the company is an excellent income stock, with a current yield of 3.4%.  The actual dividend payout tends to fluctuate more than that of U.S. stocks due to exchange rates; however the payout has been over $3 U.S. per share since 2005.

Alternatives

Alternatives to investing in PetroChina include other Chinese oil and gas stocks, such as China Petrol & Chemical (NYSE: SNP), as well as American companies such as ExxonMobil (NYSE: XOM), which my regular readers know is one of my favorite investments for the long term.  So, how does PetroChina measure up to these alternatives in terms of value, income, and growth potential?

China Petrol & Chemical (also known as Sinopec) explores for, develops, and produces crude oil and gas throughout China.  Also one of the largest companies in the world, it is controlled by the China Petroleum Corp. just like PetroChina.

Unlike PetroChina, however, Sinopec is more of a downstream oil company.  It only produces about 25% as much raw crude oil as PetroChina, but produces 60% more refined products.  Sinopec trades at a significantly cheaper valuation (10.3 times earnings); however it is not projected to grow its revenues as quickly as PetroChina.  Income investors may prefer Sinopec due to its higher dividend yield of 4.1%.

ExxonMobil, the world’s largest corporation in terms of revenues, is one of my favorite investments of any kind.  A much less risky play than either of the Chinese companies, ExxonMobil trades for just 9.3 times earnings, and is projected to grow by about 6% annually going forward.  Income investors may prefer one of the other big oil companies, since Exxon only pays 2.5% annually.

Conclusion

While ExxonMobil is definitely the safest way to go here, investors who believe in China’s growth and can stomach a little more volatility may want to take a look at PetroChina or Sinopec as a play on the increasing affluence of China’s middle class over the next decade or so.


Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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