Not unlike Petrobras (NYSE:PBR), PetroChina (NYSE:PTR) finds itself continually put into losing situations by its government. The Chinese government controls the prices at which PetroChina can sell natural gas and refined products like diesel, but cannot control the global cost of crude, nor the cost of producing oil, gas, and refined products. Couple that with aging fields, rising prices, and lower returns on capital, and PetroChina is in a difficult position.
Although that's a serious backdrop for the company, it's one in which management has always operated, and generally operated pretty well. Although aging fields in China are a concern, the company has been expanding its overseas production options and the development of shale and other unconventional resources in China could offer production growth. All told, PetroChina looks a little too cheap today and offers decent capital appreciation potential and a solid dividend.
SEE: The Power Of Dividend Growth
Natural Gas Price Hike Helps, But Only A Little
Far more so than for Sinopec (NYSE:SNP) or CNOOC (NYSE:CEO), natural gas is a big deal for PetroChina, as the company has more than 70% of the Chinese market for natural gas distribution and marketing, but has to abide by tight government price controls. The net impact of these controls has been to often make this business a money-losing proposition – particularly when the company must find outside supplies.
Recently, though, the NDRC announced some price reform. The central planning agency will allow natural gas prices to rise for non-residential customers by about 15% on average, which should mean a net price increase of around 7%. This doesn't fix all of PetroChina's natural gas business issues, but it's a step in the right direction. If nothing else, the higher price may allow PetroChina to forge an agreement with Russia's Gazprom (Nasdaq:OGZPY) to import natural gas on worthwhile terms for both parties, though it's unclear how eager the Chinese government would be to see that happen.
PetroChina Needs New Fields And New Technologies
One of the long-term challenges for PetroChina is basically the same challenge facing every other global energy major other than Petrobras – finding new cost-effective sources of oil and natural gas. While PetroChina does boast a reserve base of over 22 billion barrels (oil equivalent), with about half of that in oil/liquids, lifting costs have been increasing significantly in recent years and the company still relies on the aging Daqing field for more than one-third of its production.
SEE: Oil And Gas Industry Primer
Over time, the development of unconventional reservoirs in China (shale gas and so on) may well be an option, but that's a long-term proposition. As it stands today, Chinese service providers like China Oilfield Services (Nasdaq:CHOLY) don't have the best-of-breed technologies necessarily to develop these resources, and major service providers like Schlumberger (NYSE:SLB) are hesitant to bring their best technology to China, where it is likely to be copied (stolen) with no compensation.
In the meantime, PetroChina is looking around for fields and projects were it can gain access to attractively-priced resources. In looking to sell minority stakes of its oil/gas fields and pipelines to raise cash, PetroChina is effectively looking to upgrade its asset base without stretching its balance sheet too far – a solid plan given the circumstances.
The Bottom Line
The market is correct that PetroChina is not going to see the sort of profits and returns on capital that it used to earn 10 years ago. Where I think the market is mistaken, though, is in projecting a pretty dire combination of weak production growth, higher expenses, and weak future returns.
To that end, a multiple of 5.5x on the next twelve months' EBITDA suggests a fair value of $145. I think that multiple is fair when compared to companies like Exxon Mobil (NYSE:XOM), Petrobras, and Chevron (NYSE:CVX) when weighing the differences in reserves, probable production growth, margins, and so on. With that, I'd suggest that PetroChina is worth consideration today as an undervalued energy company trading at only a minimal premium to its existing reserve base.