case study on PTR

jamesmith

Buffett bought PetroChina from 2002 to 2003. The first time we see PetroChina shows up is in 2003 annual letter.
source: http://www.berkshirehathaway.com/letters/2003ltr.pdf

From the letter we know that Buffett paid $488 million dollars for 1.3% of PetroChina. We didn't see any discussion on this position until Buffett talked about its sale at 2007 letter. Buffett did something unusual, he gave us a glimpse of his valuation for PetroChina.
Source: http://www.berkshirehathaway.com/letters/2007ltr.pdf

Let's calculate the average price Buffett paid:
according to PetroChina's 2004 annual report: http://www.petrochina.com.cn/resource/EngPdf/2004ndyj_eng.pdf
There are 175.82 billion shares outstanding. 1.3% of that is 2,285,660,000 shares. Buffett probably bought the ADR (ticker PTR trading in US). One ADR = 100 HK share, so he paid $488 million for about 22.8566 million shares of PTR, or $21.35 per share.
Back then, Buffett and Charlie valued PetroChina's intrinsic value at $100 billion, or about $56.88 per share.
When they sold their shares, PetroChina had a market value of $275 billion, or around $160 per share. A stunning return of 42% to 52.3% annually not including dividend (depending on if we use 5 or 6 years as holding period).

The goal is try to figure out how Buffett came up with $100 Billion valuation for PTR when it has a market value of $37 Billion.

PetroChina is the publicly traded arm of CNPC (China National Petroleum Corp). It is the largest oil producer in China and it has duopoly status with Sinopec(China Petroleum & Chemical Corporation). Both company together control most of wholesale and retail business. PetroChina explores, refines and sells oil and natural gas.

Let's do a quick look on the business,
I am not an expert at this area. From what I have read, PetroChina's duopoly status with Sinopec basically eliminated  competition, this will continue unless there are dramatic changes of energy sector in China, which is unlikely. This gives PetroChina many priviledges including pricing power.
If we compare PetroChina with gold miners, there is the similiarity that they both turn natural resources into consumer products , when price of underlying product goes up, they make huge profits. But the similarity ends here, when oil/nat gas are consumed, it's gone. After gold is dug out of ground, it stays and can be resold, rented (gold renting is popular is India) or melted into other shapes. PetroChina have state support that basically eliminates competition and give them certain pricing power in China (where most of the revenue come from).

Buffett said two factors has materially increased its value: 1) rising oil price and 2) managements has done a great job building oil and natural gas reserves.

Let's look at data
source: http://www.ioga.com/Special/crudeoil_Hist.htm
Average oil price
1999  $16.55
2000        $27.40
2001        $23.00
2002        $22.81
2003        $27.69       
2004        $37.41       
2005        $50.04       
2006        $58.30       
2007        $64.20
2008        $91.48

fx rate: http://en.wikipedia.org/wiki/List_of_Renminbi_exchange_rates
Net income source: PTR annual reports
Net Income
year        RMB millon        fx rate                USD million        PTR price        Mkt Cap        
1998        14646                8.28                 1768.84         N/A
1999        26423                8.28                  3191.18         N/A
2000        54645                8.28                    6599.64          16.56                 29.11B
2001        45469                8.28                 5491.43         18.36                 32.28B
2002        46910                8.28                 5667.51         20.06                 35.27B
2003        71897                8.28                 8686.36         62.10                109.18B
2004        107646                8.28                13005.75         52.69                 92.64B
2005        139642                8.19                17046.77         85.05                149.53B
2006        149397                7.97                18740.69        132.43                232.84B
2007        155229                7.60                20414.12        173.65                305.31B

Proved developed and undeveloped reserves
source: http://www.petrochina.com.cn/Ptr ... COLLCC=3240343&
year        oil (barrells)        nat gas(Bcf)        combined(BOE, in millions)
2000        11031.8                35532.6                16453.9
2001        10959.1                36102.6                16976.2
2002        10937.0                38816.8                17406.4
2003        11494.9                41786.5                18459.3
2004        11501.2                45248.9                19042.7
2005        11536.2                48123.1                19556.7
2006        11618.0                53469.2                20529.4
2007        11705.6                57110.6                21223.9

China Crude Oil Consumption by Year
source: http://www.indexmundi.com/energy ... p;graph=consumption
Year        consumption        change
2000        4,795.72         9.90 %
2001        4,917.88          2.55 %
2002        5,160.71         4.94 %
2003        5,578.11         8.09 %
2004        6,437.48        15.41 %
2005        6,695.44         4.01 %
2006        7,263.33         8.48 %
2007        7,534.08         3.73 %


Buffett doesn't play the game of speculating oil prices, so we know the reason he invest is due to share prices heavily undervalued. In his own words, he was only paying 37 cents for $1 dollar worth of intrinsic value. Net income grew 26% annually from 1998 to 2002.
If assume growth rate will continue at 12%, with a discount rate of 6%, and shareholder's equity of $38.25 billion at 2002, we get a value of PTR at $98.16 billion. That is using 2002 equity, it has been increased with larger reserves in 2007.
I know...that is a lot of assumptions...but given PetroChina's favorable status in China, it is not unreasonable.
Let's look at another scenario, If earning have 0% growth, and with a discount rate of 6%. I got a value of $64.63 billion, buying when PTR is worth $37 billion is like paying 57 cents for 1 dollar. No matter which scenario, there is a large margin of safety. Oil price more than doubled from 2002 to 2007, if oil price is flat, I would estimate the return to be around 17% annually just from intrinsic value and larger reserve.

It is always harder sell, and Buffett admits that he might have sold too early as prices keeps going up to new highs after he sold. But it is not hard to find out that PTR is overvalued at 2007, for it to justify a market value of >$275 billion, oil prices have to be at very high level consistently, and earning growth have to be remained high. Chinese yuan unpegged from dollar is adding more variable to the valuation. It's not hard to see why Buffett sold. But looking back is always easy, if we are at the same spot, with large position in PTR and prices keeps going to new highs, it might not be so easy to make the sell decision. Being rational is key to Buffett's success.

jamesmith

In case you don't want to go through 2003 and 2007 letter, here are the screen shots related to PetroChina.

I obviously didn't pay enough attention to the letter :(
It has the share amount on it...and I kept using 1.3% of outstanding shares for caclulation...but the differences is minor

2003:


2007:

jamesmith

basic valuation I did for the no growth, 6% discount scenario...

bucks

老大这研究做得就一个字 ： 牛

redboy

jamesmith 发表于 2013-8-21 08:46 PM
basic valuation I did for the no growth, 6% discount scenario...

请问他买中油的时候你能买吗?小散在那时间可以买吗?好象小散是不能买吧。我记得08年他买高盛在115两个月后掉到50块左右如果是你大部份的钱投进去你还能握住不砍?他炒外汇一年损失8亿美元你可以吗?只是英雄莫问出处，胜者为王败者为宝寇罢了

jamesmith

redboy 发表于 2013-8-21 08:59 PM
请问他买中油的时候你能买吗?小散在那时间可以买吗?好象小散是不能买吧。我记得08年他买高盛在115两个月 ...

of course, PTR start to trade in US in 2000. 1 share of PTR = 100 shares of 0857.
0857 is listed in HK. I am not sure when PetroChina went public in HK, but at least in 2000 it is public.

redboy

jamesmith 发表于 2013-8-22 08:13 AM
of course, PTR start to trade in US in 2000. 1 share of PTR = 100 shares of 0857.
0857 is listed  ...

It went to public in China 2007 around Nov ,the price was 48 and now is 8,so if you were in China u never can buy as same as  his price he got in US or HK.

jamesmith

redboy 发表于 2013-8-22 07:53 AM
It went to public in China 2007 around Nov ,the price was 48 and now is 8,so if you were in Chin ...

When we study Buffett's, we should focus on his method, why did he invest and why did he sell? Not blindly buy whatever he holds with no regard to the price we are paying.

I believe the main Buffett bought PetroChina because it was extremely undervalued at 2002, and he sold because market is valuing PetroChina with unsustainable assumptions and it is overvalued.
If the investor looked at valuation at 2007, he would not buy PetroChina.

It seems like there are many in China that said they are following the Buffett's investment method, but pays very little attention to the price they are paying and what value they are getting.
If they really study Buffett, how can they justify buying PetroChina at 2007? No matter where it is listed. If it is only available at 2007 in China, then don't buy it at 2007. Study Buffett's method, not blindly follow his picks.

jamesmith