Business | Oil & Gas
PetroChina bites off more than it can chew
It was fun while it lasted. In the autumn of 2007, PetroChina spent a glorious 31 days as the world's largest company by way of market capitalisation, toppling some sorely aggrieved Texans.
- Financial Times
- Published: 23:37 March 28, 2009
It was fun while it lasted. In the autumn of 2007, PetroChina spent a glorious 31 days as the world's largest company by way of market capitalisation, toppling some sorely aggrieved Texans. Since then the market value of the Chinese company has fallen by two-thirds, while ExxonMobil has lost a quarter.
Taking a more dispassionate view of the China growth story, investors are now weighing a world-class operator against a fast-growing pretender, where the vast majority of production and sales remain domestic and capital discipline is often secondary to the ambitions of the government, holder of an 87 per cent stake.
PetroChina's price to book multiple of 1.4 is less than half Exxon's - a far larger discount than the five-year average. In market capitalisation terms, it is equivalent to a fat $46 billion (Dh168.9 billion).
That is not to say that PetroChina has failed to gain traction. Unlike more mature peers, which used much of the proceeds of the commodities bull market to buy back stock and spray off special dividends, PetroChina kept investing. Now, while other majors lop off a billion or two of capital expenditure here and there, PetroChina is still spending through the cycle. Full-year figures, released yesterday, showed that capex - two-thirds of it in the upstream - grew 27 per cent last year to $34 billion and should stay flat in 2009. Of the international majors, only Shell with $31 billion to $32 billion comes near.
With most of its earnings from exploring and producing, PetroChina is out of favour as oil prices languish. It has lagged behind the buoyant Shanghai benchmark by about 40 per cent this year, while Sinopec - with a much bigger refining and marketing business - has kept pace. However, for the longer term, it remains Beijing's preferred instrument of energy policy, pushing into territories such as Iran, Russia and Venezuela, where the west has had little joy. Given China's new assertiveness, such advantages are not to be underestimated.
Necessity, it is said, is the mother of invention - and Barclays is certainly being creative in how it raises capital. Some see this as evidence of the UK bank's desperation to avoid a government bail-out. The charitable view is that Barclays is addressing investor concerns about its capital levels. Either way, the effect is the same. Take its decision to sell iShares, Barclays' US exchange traded fund manager, an example of alchemy in motion.
iShares' mooted sales tag is £4 billion - equivalent to 1.8 per cent of funds under management, a punchy valuation. Apply it to the whole of Barclays Global Investors, with £1,000 billion of funds under management and of which iShares is part, and BGI would be worth £18 billion.
That is chunky given that Barclays' total market capitalisation is only £10 billion. Taken at face value, it suggests that the rest of Barclays - its investment and retail bank - has a huge negative worth. Either that, or Barclays has conjured a valuable asset out of the cupboard.
Be that as it may, buyers are apparently lining up for iShares, with Barclays generating extra tension by reportedly offering to lend the winner 80 per cent of the money it needs. Vendor financing is rarely a good idea, but here it might make sense.
Assume that iShares sells for £4 billion. Assume too that Barclays provides the bidder with £3.2 billion of debt. It would then have to set aside capital for that loan, perhaps 10 per cent, or £320 million. In return, however, it gets £4 billion of sale proceeds with which to rebuild its capital base.
This is a convoluted way for a bank to bolster its capital. However, it keeps Barclays out of government hands. It also tides Barclays over until June, when it can raise private capital without triggering anti-dilution clauses on securities issued to Gulf investors last year. Clever.
- Financial Times
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