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Are China's Top Companies Better Than Ours?

By Bob Ciura – Mar 9, 2014 at 1:15PM

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While ExxonMobil and Chevron are disappointing investors on production, PetroChina is outperforming. Here's why.

When you think of oil and gas stocks to invest in, the first companies that naturally come to mind are likely the industry heavy-weights based in the United States, including ExxonMobil (XOM 0.23%) and Chevron (CVX 0.81%). However, Chinese oil and gas giant PetroChina (PTR) should be a candidate on your watchlist as well. That's because PetroChina has the same business model as its American peers, and yet has performed much better in recent months.

With this in mind, it may be worthwhile to consider PetroChina alongside its two major U.S. competitors, based on its relative outperformance in both the upstream and downstream sides of the business.

PetroChina succeeds when U.S. rivals aren't
PetroChina hasn't yet released its fourth-quarter and full-year report, but the company's results over the first three quarters of 2013 tell a very promising story. PetroChina realized strong growth across key metrics for an oil and gas company, including rising sales, earnings per share, and expanded return on assets. Revenue grew 5% and earnings per share rose nearly 10% over the first nine months.

PetroChina's strength over the first three quarters of 2013 was due to its operational strategy. Management kept production going strong, even within a difficult environment marked by sluggish global economic growth and the threat of a Chinese economic slowdown. The results spoke for themselves. PetroChina increased crude oil output to 698 million barrels, representing 2.2% growth versus the same period in the prior year. Natural gas was an even greater strength for PetroChina. Gas production increased 9% to 2,048 billion cubic feet.

This stands in stark contrast to ExxonMobil's and Chevron's production last year. Both of the U.S. majors saw production fall in 2013, as field declines more than offset project ramp-ups. Chevron's total oil-equivalent production fell from 2.61 million barrels per day in 2012 to 2.59 barrels per day. ExxonMobil posted a 1.5% drop in production last year.

PetroChina outperformed in downstream as well
The downstream side of the integrated oil and gas spectrum, which includes refining activities, was a notable sore spot last year for most of the integrated majors. ExxonMobil and Chevron were no exception. Falling refining margins caused their downstream profits to collapse last year, and neither company is expecting a major recovery in 2014. ExxonMobil saw its core downstream segment post a 45% drop in earnings, while Chevron's combined U.S. and international downstream operations saw profits fall by nearly half last year.

To be sure, PetroChina suffered similar tough conditions on the downstream side of the business as its rivals. There was simply nowhere for the integrated majors to hide last year, as shrinking margins on refined product sales heavily weighed on profitability. However, PetroChina made notable progress on the downstream side. Its refining operations lost money through the first nine months, but its results represented a major improvement over a massive operating loss incurred in that segment the prior year.

Management attributes its relative outperformance on the downstream side of the business to keeping focus on profitable opportunities, as well as the progress made on key refinery and chemicals projects. PetroChina invested significantly in construction and upgrades of its refining and chemicals structures.

Give PetroChina a look
Major U.S.-based integrated oil and gas majors like ExxonMobil and Chevron are really struggling. Upstream profits are disappointing due to lower production, and poor refining margins mean a lot of pain on the downstream side as well. Going forward, there isn't a wealth of evidence that suggests these trends will reverse in short order.

In contrast to this is PetroChina, which kept production going strong last year and invested in its refining facilities. This is why PetroChina outperformed its U.S. competitors over the first several months of 2013. PetroChina produced solid growth on the top and bottom line through the first three quarters of last year, and that outperformance is likely to continue in the near term.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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