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Is PetroChina Cheap Enough to Attract U.S. Investors?

While most oil majors have rebounded nicely from their lows, some of the best values can still be found overseas. PetroChina (NYSE: PTR  ) is the largest oil company in China and has grown its revenue nicely over the past decade. However, since the oil bubble burst in 2008, PetroChina has struggled to rebound and is still trading for about 55% less than its highs. With this year's earnings expected to top PetroChina's pre-crash levels, (and very strong revenue growth), is now the time to get in before prices soar?

Source: TD Ameritrade

Valuing the integrated oil majors
In order to be a viable alternative for U.S. investors, PetroChina would need to be a more compelling value than its U.S.-based counterparts to make up for the additional risks (currency risks, state control, etc.). The two largest U.S. based integrated oil majors are ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) , so let's first take a look at what an investment in these will cost you.

Exxon is the largest publicly traded integrated oil company, and the second-largest publicly traded company of any kind in the world, with revenue of about half a trillion dollars per year. There seems to be a lot of general uncertainty in the market about oil prices and profitability over the next few years, and the valuations of these companies reflect that. 

In Exxon's case, shares are trading for 11.7 times this year's projected earnings. While the consensus does call for revenue growth, the future is not certain. Analysts who follow Exxon have 2015 earnings estimates ranging from $6.83 to $9.60 per share, a huge range. According to the midpoint of the projections, Exxon's earnings should rise by about 10% between now and then, but again, this is far from a certainty.

Chevron is a similar case, trading for an even cheaper 10.2 times this year's earnings. It is cheaper for a reason, however, with analysts estimating between $10.83 and $15.05 per share for next year (2014). If the numbers come in on the high end, it could be a steal at the current share price, but that is a big "if" at this point.

The two companies are pretty similar investments. Chevron pays a slightly higher yield (3.3% vs. 2.9%), and both companies have excellent records of raising their payouts every year. Both are in excellent financial shape, with more cash on their balance sheets than debt, especially in Chevron's case, where there is $10 billion more cash than long-term debt.

A little about PetroChina
As mentioned, PetroChina is the largest oil producer in the People's Republic of China, and is an integrated oil company, meaning that it engages in all aspects of the business including exploration, production, refining, marketing, and transportation. About 87% of the company is state-owned by the China National Petroleum Corporation. 

The company holds exploration licenses covering about 400 million acres and has about 11 billion barrels in proved reserves. PetroChina operates 29 refining operations across China, and also sells gasoline, kerosene, and diesel at company-owned service stations all over the country. The company has an impressive transportation network, which consists of about 25,000 miles of natural gas pipeline, over 10,000 miles of crude oil pipeline, and almost 6,000 miles of pipeline for other refined products.

As you might expect, PetroChina is the "cheapest" of the companies featured here at under 9.5 times 2013 earnings. Surprisingly, not only do the analysts who follow the company project a higher growth rate than the American companies, but they agree a little more about earnings estimates. For next year (2014), analyst estimates range from $11.58 to $14.49 per share, with a consensus of $12.86. So, even on the low end, the company is currently trading for 9.8 times next year's earnings. This is very attractive, considering that the consensus calls for earnings growth of about 7%.

An investment in PetroChina is not without risk. First off, the state of China's economic growth is very uncertain. In just the past year, there have been many conflicting reports about whether China's growth is slowing or not. Also, the company is not quite as financially sound as the U.S. majors, with a significant debt load. Finally, the amount of state control makes the company especially vulnerable to policy changes and political influences.

Final thoughts
While PetroChina is very attractively valued, there is plenty of additional risk involved. However, for those who have the risk tolerance, there could be nice profits ahead.

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9/28/2016 12:55 PM
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