Why is Warren Buffett interested in Chinese Oil ?

Why is Buffett buying PetroChina?

By Allen Wan, CBS.MarketWatch.com
Last Update: 4:54 AM ET May 6, 2003



HONG KONG (CBS.MW) - You've got to hand it to Warren Buffett. The world's most famous value investor always keeps em' guessing.

This time, it's a high-stakes investment in PetroChina -- the largest state-run oil and gas company in China but little known outside of Asia.

But since the billionaire investor disclosed late last month in a Hong Kong filing that he spent about $42 million to boost his company's stake to 9.1 percent in PetroChina, the oil company is quickly becoming a fund favorite as well as a hot stock.

PetroChina's Hong Kong shares, already up for the year, rose another seven percent since the disclosure was made on April 28. The company's New York-traded share shave performed even better, gaining slightly under 9 percent in little over a week.

Investors hoping for an explanation from Buffett as to why he recently upped Berkshire Hathaway's (BRKA: news, chart, profile) (BRKB: news, chart, profile) stake in PetroChina at a weekend annual meeting in Omaha came away disappointed.

Buffett declined to comment on his reasons for buying a stake in PetroChina, saying it was not his policy to talk about individual stocks and that he preferred to keep his strategies private.

Still, that hasn't kept people from guessing on why the billionaire has gone bullish in Chinese oil - which appears to be a marked departure from his long-held philosophy of buying stocks in U.S. businesses he knows well and are easy to assess.

"Even though Buffett doesn't know China, he knows the oil industry very well," said Shumin Huang, analyst at Goldman Sachs in Hong Kong.

Known for its insurance investments, Berkshire Hathaway has over the past few years branched heavily into energy with great success. Its purchase of MidAmerican Energy Holdings, for one, has paid off handsomely. "Already it (MEHC) has US$18 billion of assets and delivers our largest stream of non-insurance earnings. It could well grow to be huge," Buffett reportedly said in a 2002 letter to shareholders.

Analysts from Citigroup Smith Barney in Hong Kong also agree that Buffett's move may not represent such a departure at all, given his investment criteria and recent interest in energy.

"We believe the investment should be viewed as opportunistic entry into a value stock that meets Berkshire Hathaway's investment criteria, with some knowledge contributed from recent investments in U.S. natural gas pipelines," the broker said in a note.

Berkshire Hathaway has recently been buying pipelines and other strategic stakes from cash-strapped energy companies.

One Hong Kong-based analyst, who declined to be identified, said that Buffett is simply investing in PetroChina, which pumps about two-thirds of the oil and natural gas produced in China, because it offers a great chance for him to obtain a 10 percent pretax return.

Chinese oil companies have been reporting banner results, driven largely by booming demand in the mainland and soaring oil prices.

Last month, PetroChina reported a slightly better-than-expected net profit of 46.9 billion yuan ($5.68 billion) in 2002, up 3.2 percent from the year before. Its rival Sinopec (SNP: news, chart, profile), meanwhile, reported a first-quarter net profit that was 12 times higher than year-ago levels. Offshore oil and gas producer CNOOC (CEO: news, chart, profile) said oil and gas output jumped over 23 percent, while revenues climbed 87 percent.

But analysts believe PetroChina is still cheap relative to its peers.

"While in our opinion, PetroChina continues to represent the best price to intrinsic value among the three oil names...a number of risks remain with regard to the development of its gas business," Citigroup Smith Barney said in the note.

Goldman's Huang is another fan of the stock, though its recent run-up compelled her to cut the target price to HK$1.85.

PetroChina was trading down 2.2 percent at HK$1.78 in late trade Tuesday.

Huang said PetroChina offers a strong balance sheet, strong cash flow and a high dividend yield. "And longer term, you have a Chinese economy that is growing strongly and that is going to increase demand for oil," she said.

China is now the world's third-largest consumer of oil after the United States and Japan.

Allen Wan is the Asia bureau chief for CBS MarketWatch, based in Tokyo.