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Berkshire Hathaway Inc. Message Board

  • iluvbabyb iluvbabyb Dec 30, 2003 11:17 AM Flag

    Buffett and PetroChina

    skunky sent me this article from www.cfo.com that provides some interesting insights on Buffett's investment in PetroChina. The whole article is worth reading...here's a few tidbits ;-)

    PetroChina's transparency has won admiration -- and investment dollars -- from Warren Buffett. But can the state-owned giant really deliver?

    The ultimate validation came in April this year when Warren Buffett, the world's most conservative yet most successful investor, bought 2.3 billion shares of PetroChina stock listed in Hong Kong. Buffett-controlled Berkshire Hathaway is now the Chinese company's third-largest shareholder after CNPC and British oil giant BP.

    Mao Zefeng, assistant secretary to the board and head of investor relations, briefed Buffett at his Omaha headquarters in October. "He was very lively and asked a lot of questions," says Mao. "He said he invested in PetroChina after studying our financial reports, which he said were much better than those of many American companies." What's more, the PetroChina stake represents the first high profile foray of the formidable Nebraskan into a company that is majority owned by a government. The fact that the government happens to be that of volatile China where the market, economists predict, is headed toward overheating, suggests that Wang's numbers must have presented a convincing tale indeed.

    In fact, Buffett told Mao that he regrets not buying more shares. Certainly, the stock has already rocketed. Berkshire's April purchases average out at around HK$1.65 per share. On October 15, PetroChina closed at HK$2.85, valuing Berkshire's stake at HK$6.7 billion (about US$863 million). In less than six months, Berkshire is looking at capital gains of more than US$363 million. That is on top of the interim dividend of around US$30 million due to Berkshire after PetroChina reported record first-half profits of Rmb38.6 billion, up 102 percent over the same period in 2002. The consensus 2003 earnings-per-share forecast of 21 analysts polled by Multex Global Estimates is HK$0.36 (for a price-earnings multiple of 7.9 times), with forecast dividend at HK$0.163 per share (for a dividend yield of 5.7 percent).

    Buffett's purchase could be a two-edged sword in this regard. While he is known to buy and hold for the long term, he could dump PetroChina if he gets uncomfortable with the political and social risks in China. If Buffett were to sell for any reason, PetroChina's stock would almost certainly tank´┐Żand the company's reputation would sink along with it.

    PetroChina already had a foretaste of this in August when its stock price fell 2.1 percent in one day. Buffett disclosed to US regulators that he had sold US$5 million worth of PetroChina's American Depositary Shares in the second quarter of 2003. Flustered investors rushed to the exits. Was Buffett's confidence in PetroChina wavering? The markets were reassured when it was revealed that Buffett's ADS sales were made before he accumulated the 2.3 billion in H-shares he bought in Hong Kong.

    Wang is quietly chuffed at Buffett's interest in PetroChina, especially since Buffett made the decision largely by perusing the financial reports that Wang and his staff prepared. "Our annual reports contain not just financial but also operating data," he says. "We report production data every quarter and reserves as well, because they are an oil company's most important asset." He knows the importance of information. "I have read several books about Mr. Buffett," says Wang. "He never makes a hasty decision on any investment. He does a lot of research first." The CFO thinks PetroChina's conservative, dividend-paying culture fits well with Buffett's investment philosophy. "We focus on long-term returns. We never chase short-term results."

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    • '"Our annual reports contain not just financial but also operating data," he says. "We report production data every quarter and reserves as well, because they are an oil company's most important asset."'

      PTR's reporting is as good as anyone else's in the business, inclduing Exxon and Royal Dutch. Very impressive and they clearly did their home work before putting these reports together. The only drawback, if there is one, is that it is more difficult to get a handle on the quality of non-reserve fixed assets, such as P & E, but they are also apending vast sums on new projects & upgrades.

      After reading the reports, I was personally surprised that so many analysts were negative on the company, but I probably shouldn't have been, because their views were almost entirely based on top-down and projections of oil and gas prices and, of course, extremely myopic. The consensus earnings forecast for 2004 is still down. Their views in no way, that I could see, were based on reserves and production per share. The only oil analyst to even begin to trust, IMHO, is Charles Maxwell anyway, who takes a very long-term view, and is very bullish.

      ML even put a sell on the shares at $27 or so, based in large part on oil price forecasts, and in part on the theory that when the Chinese market is opened up to competition that PTR would not be able to compete with the supposedly more efficient Exxons and Royal Dutches of the world. However, even if true, China doesn't appear to be type of nation that will allow sudden and intense competition.

      One has to keep in mind what we are seeing here is the price in US dollars per share, based on the current fixed exchange rate between the dollar and Chinese currency, which may or may not be reflective of reality.

      The Chinese markets will continue to be volatile for quite some time, and influenced by Chinese investors who are mostly gamblers, but this shouldn't cloud one's opinion of the value of a company.

    • Thanks. Interesting. Just a couple of questions, please.

      1. What is the advantage of H shares over ARDs?

      2. Is the price to sales ratio of concern? It's about 3 times that of BP, RD or XOM.

 
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