Shares of Asia's largest oil producer, Petrochina (NYSE:PTR), traded sideways on Monday but the stock is up 80% just in the last three month on the back of the strong crude. But when a large cap company like Petrochina rallies so much in such a short period of time, valuation concerns surface. This is why we took a close look at Petrochina.
Detailed results for the first quarter of 2009 are available for PetroChina and Sinopec (NYSE:SNP). The following charts show a comparison between PTR and SNP in terms of key income statement variables and ratio analysis.
Although SNP had relatively higher revenues for the past quarter, it still incurred higher operating expenses as compared with PTR. Therefore, in terms of final results, PTR recorded a higher net income. Based on ratio analysis, however, PTR compares unfavourably with SNP in terms of ROE and ROA. The higher asset and equity base of PTR is also contributing to the lower ROE and ROA. As for profit margin and operating profit margin, PTR managed to score a higher value as compared with SNP.
The industry performance is highly sensitive to fluctuations in crude oil prices and the taxes imposed by the Chinese government. Higher market values of crude oil mean lower margins for the industry. This is shown in the following chart comparing PTR’s profit margin over the past five quarters with average quarterly oil price:
PTR’s profitability improved after oil prices started declining. However, another problem facing the industry is that oil prices locally are not tied to global market prices. Firms in the industry purchased crude oil at higher market prices and were forced to sell it locally at lower prices resulting in lower margins.
Lower oil prices mean lower taxes for the industry. But it highlights the fact that demand is slowing for the industry which eventually will affect cash flows. The following charts compare net operating cash flows, free cash flows and cash balance for PTR, SNP and CNOOC Ltd. (NYSE:CEO) for the past three years:
The charts show that operating cash flows for 2008 are lower for PTR and SNP with CNOOC being the exception. A similar analysis shows that free cash flows are negative for 2008 for PTR and SNP. It highlights that cash flows for the overall industry are decreasing. As a result, firms in the industry will need to raise extra capital either through debt or equity. First quarter cash flows of 2009 for PTR and SNP are also examined in the following chart:
The chart shows that operating cash flows and the cash balance are higher for PTR. However, free cash flows are lower compared to SNP. PTR has a better cash position when compared to SNP based on the previous chart. However, the need to raise cash is still important for the company as indicated by recent news. PTR has announced plans to raise RMB 100 million for 2009 operations. The company is tapping into the debt market by issuing long term debt securities.
PTR has recently announced a plan to acquire a 45.51% stake in Singapore Petroleum Company. The deal is part of the planned expansion for PTR in 2009.