huangt · March 26, 2020 06:21 · KamarajuKusumanchi · Feb 24, 2016 · alexanderhawl · Mar 26, 2020
diff --git a/case study on PTR b/case study on PTR
 Buffett bought PetroChina from 2002 to 2003. The first time we see PetroChina shows up is in 2003 annual letter.
 source: http://www.berkshirehathaway.com/letters/2003ltr.pdf

 From the letter we know that Buffett paid $488 million dollars for 1.3% of PetroChina. We didn't see any discussion on this position until Buffett talked about its sale at 2007 letter. Buffett did something unusual, he gave us a glimpse of his valuation for PetroChina.
 Source: http://www.berkshirehathaway.com/letters/2007ltr.pdf

 Let's calculate the average price Buffett paid:
 according to PetroChina's 2004 annual report: http://www.petrochina.com.cn/resource/EngPdf/2004ndyj_eng.pdf
 There are 175.82 billion shares outstanding. 1.3% of that is 2,285,660,000 shares. Buffett probably bought the ADR (ticker PTR trading in US). One ADR = 100 HK share, so he paid $488 million for about 22.8566 million shares of PTR, or $21.35 per share. 
 Back then, Buffett and Charlie valued PetroChina's intrinsic value at $100 billion, or about $56.88 per share. 
 When they sold their shares, PetroChina had a market value of $275 billion, or around $160 per share. A stunning return of 42% to 52.3% annually not including dividend (depending on if we use 5 or 6 years as holding period). 

 The goal is try to figure out how Buffett came up with $100 Billion valuation for PTR when it has a market value of $37 Billion.

 PetroChina is the publicly traded arm of CNPC (China National Petroleum Corp). It is the largest oil producer in China and it has duopoly status with Sinopec(China Petroleum & Chemical Corporation). Both company together control most of wholesale and retail business. PetroChina explores, refines and sells oil and natural gas. 

 Let's do a quick look on the business,
 I am not a expert at this area. From what I have read, PetroChina's duopoly status with Sinopec basically eliminated  competition, this will continue unless there are dramatic changes of energy sector in China, which is unlikely. This gives PetroChina many priviledges including pricing power. 
 If we compare PetroChina with gold miners, there is the similiarity that they both turn natural resources into consumer products , when price of underlying product goes up, they make huge profits. But the similarity ends here, when oil/nat gas are consumed, it's gone. After gold is dug out of ground, it stays and can be resold, rented (gold renting is popular is India) or melted into other shapes. PetroChina have state support that basically eliminates competition and give them certain pricing power in China (where most of the revenue come from). 

 Buffett said two factors has materially increased its value: 1) rising oil price and 2) managements has done a great job building oil and natural gas reserves.

 Let's look at data
 source: http://www.ioga.com/Special/crudeoil_Hist.htm
 Average oil price
 1999  $16.55
 2000  $27.40
 2001	$23.00
 2002	$22.81
 2003	$27.69	
 2004	$37.41	
 2005	$50.04	
 2006	$58.30	
 2007	$64.20 
 2008	$91.48

 fx rate: http://en.wikipedia.org/wiki/List_of_Renminbi_exchange_rates
 Net income source: PTR annual reports
 Net Income
 year	RMB millon	fx rate		USD million	PTR price	Mkt Cap 	
 1998	14646		8.28		 1768.84	 N/A
 1999	26423		8.28	 	 3191.18	 N/A
 2000	54645		8.28	   	 6599.64 	 16.56		 29.11B
 2001	45469		8.28		 5491.43	 18.36		 32.28B
 2002	46910		8.28		 5667.51	 20.06		 35.27B
 2003	71897		8.28		 8686.36	 62.10		109.18B
 2004	107646		8.28		13005.75	 52.69		 92.64B
 2005	139642		8.19		17046.77	 85.05		149.53B
 2006	149397		7.97		18740.69	132.43		232.84B
 2007	155229		7.60		20414.12	173.65		305.31B

 Proved developed and undeveloped reserves
 source: http://www.petrochina.com.cn/Ptr/Investor_Relations/Periodic_Reports/Annual_Report/?COLLCC=3240343&
 year	oil (barrells)	nat gas(Bcf)	combined(BOE, in millions)
 2000	11031.8		35532.6		16453.9
 2001	10959.1		36102.6		16976.2
 2002	10937.0		38816.8		17406.4
 2003	11494.9		41786.5		18459.3
 2004	11501.2		45248.9		19042.7
 2005	11536.2		48123.1		19556.7
 2006	11618.0		53469.2		20529.4
 2007	11705.6		57110.6		21223.9

 China Crude Oil Consumption by Year
 source: http://www.indexmundi.com/energy.aspx?country=cn&product=oil&graph=consumption
 Year	consumption	change
 2000	4,795.72	 9.90 %
 2001	4,917.88 	 2.55 %
 2002	5,160.71	 4.94 %
 2003	5,578.11	 8.09 %
 2004	6,437.48	15.41 %
 2005	6,695.44	 4.01 %
 2006	7,263.33	 8.48 %
 2007	7,534.08	 3.73 %


 Buffett doesn't play the game of speculating oil prices, so we know the reason he invest is due to share prices heavily undervalued. In his own words, he was only paying 37 cents for $1 dollar worth of intrinsic value. Net income grew 26% annually from 1998 to 2002. 
 If assume growth rate will continue at 12%, with a discount rate of 6%, and shareholder's equity of $38.25 billion at 2002, we get a value of PTR at $98.16 billion. That is using 2002 equity, it has been increased with larger reserves in 2007. 
 I know...that is a lot of assumptions...but given PetroChina's favorable status in China, it is not unreasonable. 
 Let's look at another scenario, If earning have 0% growth, and with a discount rate of 6%. I got a value of $64.63 billion, buying when PTR is worth $37 billion is like paying 57 cents for 1 dollar. No matter which scenario, there is a large margin of safety. Oil price more than doubled from 2002 to 2007, if oil price is flat, I would estimate the return to be around 17% annually just from intrinsic value and larger reserve.

 It is always harder sell, and Buffett admits that he might have sold too early as prices keeps going up to new highs after he sold. But it is not hard to find out that PTR is overvalued at 2007, for it to justify a market value of >$275 billion, oil prices have to be at very high level consistently, and earning growth have to be remained high. Chinese yuan unpegged from dollar is adding more variable to the valuation. It's not hard to see why Buffett sold. But looking back is always easy, if we are at the same spot, with large position in PTR and prices keeps going to new highs, it might not be so easy to make the sell decision. Being rational is key to Buffett's success.
	Buffett bought PetroChina from 2002 to 2003. The first time we see PetroChina shows up is in 2003 annual letter.
	source: http://www.berkshirehathaway.com/letters/2003ltr.pdf

	From the letter we know that Buffett paid $488 million dollars for 1.3% of PetroChina. We didn't see any discussion on this position until Buffett talked about its sale at 2007 letter. Buffett did something unusual, he gave us a glimpse of his valuation for PetroChina.
	Source: http://www.berkshirehathaway.com/letters/2007ltr.pdf

	Let's calculate the average price Buffett paid:
	according to PetroChina's 2004 annual report: http://www.petrochina.com.cn/resource/EngPdf/2004ndyj_eng.pdf
	There are 175.82 billion shares outstanding. 1.3% of that is 2,285,660,000 shares. Buffett probably bought the ADR (ticker PTR trading in US). One ADR = 100 HK share, so he paid $488 million for about 22.8566 million shares of PTR, or $21.35 per share.
	Back then, Buffett and Charlie valued PetroChina's intrinsic value at $100 billion, or about $56.88 per share.
	When they sold their shares, PetroChina had a market value of $275 billion, or around $160 per share. A stunning return of 42% to 52.3% annually not including dividend (depending on if we use 5 or 6 years as holding period).

	The goal is try to figure out how Buffett came up with $100 Billion valuation for PTR when it has a market value of $37 Billion.

	PetroChina is the publicly traded arm of CNPC (China National Petroleum Corp). It is the largest oil producer in China and it has duopoly status with Sinopec(China Petroleum & Chemical Corporation). Both company together control most of wholesale and retail business. PetroChina explores, refines and sells oil and natural gas.

	Let's do a quick look on the business,
	I am not a expert at this area. From what I have read, PetroChina's duopoly status with Sinopec basically eliminated competition, this will continue unless there are dramatic changes of energy sector in China, which is unlikely. This gives PetroChina many priviledges including pricing power.
	If we compare PetroChina with gold miners, there is the similiarity that they both turn natural resources into consumer products , when price of underlying product goes up, they make huge profits. But the similarity ends here, when oil/nat gas are consumed, it's gone. After gold is dug out of ground, it stays and can be resold, rented (gold renting is popular is India) or melted into other shapes. PetroChina have state support that basically eliminates competition and give them certain pricing power in China (where most of the revenue come from).

	Buffett said two factors has materially increased its value: 1) rising oil price and 2) managements has done a great job building oil and natural gas reserves.

	Let's look at data
	source: http://www.ioga.com/Special/crudeoil_Hist.htm
	Average oil price
	1999 $16.55
	2000 $27.40
	2001 $23.00
	2002 $22.81
	2003 $27.69
	2004 $37.41
	2005 $50.04
	2006 $58.30
	2007 $64.20
	2008 $91.48

	fx rate: http://en.wikipedia.org/wiki/List_of_Renminbi_exchange_rates
	Net income source: PTR annual reports
	Net Income
	year RMB millon fx rate USD million PTR price Mkt Cap
	1998 14646 8.28 1768.84 N/A
	1999 26423 8.28 3191.18 N/A
	2000 54645 8.28 6599.64 16.56 29.11B
	2001 45469 8.28 5491.43 18.36 32.28B
	2002 46910 8.28 5667.51 20.06 35.27B
	2003 71897 8.28 8686.36 62.10 109.18B
	2004 107646 8.28 13005.75 52.69 92.64B
	2005 139642 8.19 17046.77 85.05 149.53B
	2006 149397 7.97 18740.69 132.43 232.84B
	2007 155229 7.60 20414.12 173.65 305.31B

	Proved developed and undeveloped reserves
	source: http://www.petrochina.com.cn/Ptr/Investor_Relations/Periodic_Reports/Annual_Report/?COLLCC=3240343&
	year oil (barrells) nat gas(Bcf) combined(BOE, in millions)
	2000 11031.8 35532.6 16453.9
	2001 10959.1 36102.6 16976.2
	2002 10937.0 38816.8 17406.4
	2003 11494.9 41786.5 18459.3
	2004 11501.2 45248.9 19042.7
	2005 11536.2 48123.1 19556.7
	2006 11618.0 53469.2 20529.4
	2007 11705.6 57110.6 21223.9

	China Crude Oil Consumption by Year
	source: http://www.indexmundi.com/energy.aspx?country=cn&product=oil&graph=consumption
	Year consumption change
	2000 4,795.72 9.90 %
	2001 4,917.88 2.55 %
	2002 5,160.71 4.94 %
	2003 5,578.11 8.09 %
	2004 6,437.48 15.41 %
	2005 6,695.44 4.01 %
	2006 7,263.33 8.48 %
	2007 7,534.08 3.73 %


	Buffett doesn't play the game of speculating oil prices, so we know the reason he invest is due to share prices heavily undervalued. In his own words, he was only paying 37 cents for $1 dollar worth of intrinsic value. Net income grew 26% annually from 1998 to 2002.
	If assume growth rate will continue at 12%, with a discount rate of 6%, and shareholder's equity of $38.25 billion at 2002, we get a value of PTR at $98.16 billion. That is using 2002 equity, it has been increased with larger reserves in 2007.
	I know...that is a lot of assumptions...but given PetroChina's favorable status in China, it is not unreasonable.
	Let's look at another scenario, If earning have 0% growth, and with a discount rate of 6%. I got a value of $64.63 billion, buying when PTR is worth $37 billion is like paying 57 cents for 1 dollar. No matter which scenario, there is a large margin of safety. Oil price more than doubled from 2002 to 2007, if oil price is flat, I would estimate the return to be around 17% annually just from intrinsic value and larger reserve.

	It is always harder sell, and Buffett admits that he might have sold too early as prices keeps going up to new highs after he sold. But it is not hard to find out that PTR is overvalued at 2007, for it to justify a market value of >$275 billion, oil prices have to be at very high level consistently, and earning growth have to be remained high. Chinese yuan unpegged from dollar is adding more variable to the valuation. It's not hard to see why Buffett sold. But looking back is always easy, if we are at the same spot, with large position in PTR and prices keeps going to new highs, it might not be so easy to make the sell decision. Being rational is key to Buffett's success.