Tuesday, July 31, 2007

PetroChina Update

Shares of PetroChina, the world's second largest oil company, continued to ease as investors panicked after Warren Buffett unexpectedly reduced his stake in the oil giant, sparking fears he may cut his stake further. Hong Kong stock exchange filings show that Buffett's Berkshire Hathaway reaped HK$210.3 million by selling 16.9 million PetroChina shares at an average price of HK$12.441 apiece on July 12, trimming its stake to 10.96 percent from 11.05 percent. It marked the first time Buffett had lowered his stake in PetroChina since 2003, when his investment became public knowledge. Some speculate that Buffett's divestment was motivated by profit taking after the stock hit a record high of HK$12.44 on July 9.

The shock over the sale by Warren is a bit silly when he is just selling down just a small portion of his stake. As Berkshire Hathaway still holds a very significant 10.96% in PetroChina, people need not worry. There could be so many reasons for him selling that is not related to future prospects for PetroChina.

A resolution on divestment was discussed at Berkshire Hathaway's annual general meeting in May, as PetroChina, through state-owned parent China National Petroleum Corp, was seen as too closely linked to Sudan, whose government has been blamed for the violence in Darfur. But the proposal was defeated after Buffett said he disagreed with the resolution as any divestment would not help improve the situation in Sudan. It is more likely that the sale was due to the stock's high valuation rather than the pressure from activists.

Despite the recent run up in Chinese shares, PetroChina still currently trades at just 14x 2007/2008 earnings. The company should be one of the first to move back to for a full Shanghai listing - I mean you are talking of a company which should make RMB175bn in 2007, that's RM80.27bn or US$23.3bn. The company is run very well by savvy pros. Their oilfields reserves are OK, cost may nudge higher but still a very attractive asset base. The covered warrants should be bought on weakness, esp the c1 and c3 expiring early next year.

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