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Chinese Oil

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By RodgerRafter
June 19, 2006

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PTR, SNP and CEO are ticker symbols for the three big Chinese Oil Companies. They have ADRs that trade on the NYSE so US investors can buy them.

All three are majority owned, and totally controlled by the Chinese government. PTR is 90% owned by the Chinese government, SNP is 70% and CEO is about 64%.

All three are hugely profitable and pay good dividends. All three have had very good stock performance but have recently pulled back 20% or more. Berkshire Hathaway made a big purchase in PTR a couple of years back that has done very well for Warren Buffett and Co.

The companies are largely protected against competition by the Chinese government. Each of them has their own market segment where they have near monopoly power. The monopoly status may be changing gradually, but protecting the profits of the companies is in the interest of the Chinese government.

PTR is the dominant oil producer on the mainland.
CEO does offshore exploration and invests in foreign oil companies and development projects abroad. (CEO was the company that tried to purchase Unocal.) SNP has some production on the mainland but purchases most of their oil from PTR and on the international market. They also run the main plastics and petrochemicals business in China.

There is a geopolitical risk in owning the stocks because at any point the Chinese government could decide to take measures that dramatically reduce their profitability and/or take away their monopolistic advantages. I think the immediate risk of this is very small because China wants to maintain a positive relationship with foreign investors. These companies generate significant revenue for the Chinese government, but more revenue could be skimmed from foreign shareholders by raising taxes on the three companies. Longer term, a possible breakdown in the trade relationship with the US could potentially result in measures that reduce returns for the holders of NYSE traded shares. It is something that I keep an eye out for, since I have significant stakes in Chinese oil.

Chinese oil production is not as developed as oil production in many other parts of the world. While global proven reserves around the globe are declining, PTR's Chinese reserves increased slightly from 2002 to 2004. I haven't seen anything to indicate that China in near reaching peak oil production.

Foreign currency fluctuations impact total returns for US investors. Chinese Oil companies make their profits in RMB, which have been slowly appreciating against the dollar since the strict peg was broken last summer. If a company's RMB earnings were flat year over year, the earnings in dollars would have shown about a 3% increase for US investors.

Other bits of information:
PTR & CEO benefit from rising oil prices.
SNP suffers from rising oil prices because their plastics and chemicals businesses outweigh their oil production. SNP used to go down when oil went up and up when oil wend down, but lately Crude and SNP (and PTR & CEO) have been moving together on waves of liquidity.

SNP is PTR's largest customer for crude oil.
PTR dominates gasoline sales in the North and charges higher prices there. SNP has a bigger presence in the South but PTR has a joint venture with BP to build up retail in Guangdong. CEO had a secondary offering in early May, when the stock prices of all three were near their tops. SNP received a huge grant from the government, supposedly to make up for high global oil prices, and that boosted earnings. This came shortly before CEO's stock offering.


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