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.
A guy named Mr. Market decided that. He often makes silly decisions, but he constantly reviews them with 100's of millions of brains linked together -- sort of like SETI's distributed computing model. This company has less than HALF of Exxon's reserves. China doesn't have as much proven reserves as the United States - about half in fact. They may find more, but right now this looks much too high. Mr. Market will correct it within the year, I expect.