below 10 for oil companies? Why is P/E of 20 for PTR wrong and P/E of 12.5 for XOM right? Why isn't XOM P/E at 20? or 30? or more? Isn't energy as important as drugs or computers? Why are other oil companies below P/E of 10?
Is PTR overvalued, or are other oil companies undervalued?
We are in the midst of a commodity bull and analysts have decided that the king of commodities (oil) companies are only worth P/Es less than the market average? Huh?????
Most commodity stocks trade on their book values (i.e. PB ratio) which determine their take-over prices.
The reason is very simple. their company assets are mainly the reserves of commodities that are priced in international price.
That's why the oil stocks rally when the oil price goes up. For the same reasons, the gold stocks rally when the gold price goes up.
There's no silver bullet answer to your inquiry. But here's a few bullet points for your consideration:
1. As I say, PTR has a different ownership base and structure. The alternatives to Chinese investors are more limited. For example, they simply can't purchase shares in XOM.
2. Along those lines, the risk-free interest rates in China are below other world markets. Putting U.S. rates at 5% would give the owner of a fixed income investment a P/E of 20. China, however, is offering about 4%. So the P/E on that investment would be 25. In other words, that's the best the Chinese investor can do without taking on market risk. Even so, the 4% is below their inflation rate hurdle, so you're really not even treading water at 4%. Still, for comparison's sake, that's the nominal yield. Which, in turn, justifies in real terms the higher valuation.
3. In comparing real rates of return, an investment in XOM is denominated in U.S. dollars. Those dollars are losing value and many believe will continue to do so. China, on the other hand, is denominated in a more promising currency, in which one's investment will ultimately be realized. And the kicker is, their currency may soon (shall we say, sooner or later) increase in value. So there's that boost to think about.
I haven't really been following China versus U.S. currency comparisions. I don't think there's been much action there, as China continues to buy our Treasuries their currency fate is pretty well tied to ours.
But as a brief aside, by way of illustration, I also own PetroBrasil (PBR), whose return to me has been augmented about 16% Y-T-D simply because their currency has strengthened by that amount versus the U.S. dollar.
Again, many believe there is an upside kicker when China decouples it's currency and it seeks much higher ground.
4. PTR, and it's sister companies, represents a sort of quasi-monopoly in China. China is the proverbial 600 pound gorilla. Where does it sit? -- anywhere it wants to.
One recent example, I was involved as a shareholder in PetroKazakhstan (PKZ) when the Chinese went after it. An Indian company made some overtures as well, but of course the Chinese government won out. The transaction was somewhat convoluted, I won't go into the details, but suffice it to say, PTR was awarded those oil fields and came out smelling like a rose. PKZ shareholders made a bundle, but I'd just as soon still own those assets outright. Needless to say, it was all quite interesting. And a precedent was established. I don't see that changing. If anything, PTR must get even more aggressive. And their shareholders will be the beneficiaries of future investment activities.
5. But the area that is of most interest to me, what I have referred to as the free "lottery ticket," is that China has indicated they are on the verge of announcing and quantifying their recently more than rumored oil and gas find. These resources are in the bag -- a bag that as of yet remains a "pig in a poke," if you know that expression.
Well, it's got to be worth something. So it's just a matter of quantifying it. It will show significant upside value to shareholders, we just don't know how much.
In closing, these are a few reasons that justify PTR's market cap. In reality, it's a different animal operating in a different forest than XOM.
Yes, I believe XOM is too cheap. Just because some BS anal-syt says that PTR is too expensive relative to XOM doesn't mean that XOM is priced right and PTR must decline. I think the Chinese have it priced right and the problem is that XOM is too cheap. XOM should be double its current share price. And so should COP, CVX, BP, TOT, STO, ETC.
I think you're asking good questions. The reality is, P/E has a very, very limited role in the valuation of oil companies. Especially so where E&P or "upstream" plays a significant role in their business model.
The problem with P/E analysis, the reason it is the wrong yardstick, is that the reserves get no weighting. In fact, to the extent that "upstream" producers like both PTR and XOM have to acquire reserves at ever escalating prices, when they create true shareholder value by adding reserves today at prices below which they can sell them in the future, the cost goes against immediate earnings.
In the broadest sense, you were wondering who "decides" what the right P/E should be. To answer that, one needs to put all investments on a level playing field. To achieve this, one needs to make an intelligent estimate of each investment's Intrinsic Value. Be it a lemonade stand, a treasury note, an ounce of gold, or common stock. One needs to determine the sum of all future returns, and discount this back to present value.
By discount back to present value, I mean consider all future streams of income, including but not limited to the wholesale sale of the company or non-income producing commodities it owns. And divide this amount back by the current risk-free interest rate (so that you capture the time value of money.)
A comparison between PTR and XOM somewhat forces an apples and oranges scenario because of investment limitations at the "who can invest" level. Before we explore that, let's look at the P/E of, say, a risk-free treasury paying paying 5%. What is the P/E of this investment vehicle?
If you said it has a P/E of 20 that is correct.
Why would PTR have a P/E above 20? There are many reasons. For starters, the risk-free yields available to Chinese investors are below 5%, albeit artificially so, being below even their rate of inflation. So if an investor needs to "break-even" after inflation, he should expect to pay more than 20 times the price to earnings figure.
If the risk-free rate for Chinese investors were 4%, (and I believe it is in that ballpark,) then his earnings yield would give him a P/E of 25.
Why would he put his money in the bank at 4%, meaning a P/E of 25, when he could buy PTR at an earnings yield below that, meaning a P/E of less than 25? Well, that's part of the explanation for PTR's P/E.
I'm not pushing PTR or XOM or anything like that -- just trying to help you understand the level of the playing field.
The beauty of PTR is manifold: One the one hand, as a quasi-monopoly, it has the government's backing and purchasing power. More tangible and immeditate, however, one the other hand, it has the nearly risk-free "lottery ticket" upside of the as yet fully disclosed reserves discovery. That makes things real interesting.
The additional reserves will do nothing to lower the P/E. Yet it has been the goal and the ever-escalating endeavor, which the company has been pursuing, and continues to pursue. PTR is, among other things, largly an E&P or "upstream" concern.
Hey, if you want a cheap oil stock, why not buy Valero (VLO) at less than 7 times earnings. Well, VLO (which I also own) doesn't have any "upstream" reserves --that's part of the answer.
In closing, I'm not pumping PTR. I'm not guessing where it will open or close tomorrow, next week or so forth. But I will conclude that valuing the company on it's P/E is the absolute wrong way to look at it. Especially for "upstream' companies like both PTR and XOM. Hopefully, I've given you an idea of why that is, and how to consider the level of the playing field.
This is very good article.
I just bought PTR on 11/08/07.
If considering 19% earning growth, 18.69 P/E (11/09/07) is very cheap. (XOM's earning growth is -10% in this quarter)
PTR's Div & Yield: 5.40 (2.70%) while XOM's Div & Yield: 1.40 (1.60%)
I believe PTR will find more and more China's undiscovered reserve. Upside potential is huge.
I think you missed my point entirely. My point was not a question about how to value oil companies, but my point was that they are all being under appreciated in the market place considering the value of the enegy commodity. The market still has not grasped the true value of energy when internet companies are trading at 10x the value of oil companies.
Your detailed analysis is just fine and dandy, but the P/E is still the metric of choice for most investors. As proof, here's a clip from an AP article released this morning:
"PetroChina shares have risen 45.6 percent over the past month alone," Bear Stearns said. "Time to take profit."
Based on Wall Street consensus forecasts, PetroChina was trading at a 72 percent premium to Exxon Mobil based on a 2008 price-to-earnings valuation. "From an operational perspective, we see little reason for this disparity," the investment bank said.
When measured by earnings, Exxon remains a much larger company. Its $9.41 billion in third-quarter net profit, while down 10 percent from a year earlier, nearly matched PetroChina's net profit of 81.8 billion yuan ($10.8 billion) for the entire first half of the year.
Exxon's oil and gas reserves -- a gauge of future profit potential -- stood at 22.7 billion barrels by the end of 2006, compared with PetroChina's 20.5 billion barrels.
AP Business Writer John Porretto in Houston contributed to this report.
How did Bear Stearns value PTR - answer: relative to XOM's P/E. And then BS also mentions that their reserves are about the same.
But, I don't care what metric you choose. Again, my point was not to quibble about what metric to use to value a company; pick P/B if you like. My point was that energy companies are not being given valuations commensurate with their value to society.
I repeat: Why should any oil company be valued at less than the market average value? Is PTR value wrong, or is XOM too cheap? My opinion is that XOM, PTR and most all oil companies, are too cheap. The value of the commodity is and will prove to be much more valuable than investors judge today as demand continues its relentless increase and supply continues its relentless decrease. As oil is extracted and consumed (burned up) at ever increasing quantities, the comparison between your treasury bill interest rate becomes meaningless. Oil is a finite tangible item undergoing continuous destruction and the world is not seeing it in its true value, yet.
that's a great explanation..do you combine TA charts with your fundie analysis - if so that are your near term targets for PTR? I have been long PTR for two years...added on dips abd did well everytime..not so sure about buying the dip yesterday. Thanks! 12b