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Renaissance Technologies Pulls Back

March 26, 2014 | About:

Late news about the oil and gas industry highlight overall performance improvements for companies based in the Asian region. The report is all the more relevant when taking into account the slowdown in the Chinese economy. Both Sinopec (SNP) and PetroChina (PTR) experienced increments on net revenues year over year of $10.6 billion and $20.7 billion, respectively.

With respect to the near future, PetroChina chairman Zhou Jiping said, "Domestic demand for oil and gas will likely maintain fixed growth as the long-term trend of the domestic economy improving remains unchanged." In other words, growth is expected to remain stable at similar levels in the short term. So, what is expected in the long-term and can guru trading give us a clue?

Delivering Profits

The latest quarterly report published by PetroChina highlighted steady growth in production and operations, by pursuing quality, profitability and sustainable development. The growth registered is set against a difficult domestic and international economic environment. Moreover, the strategy is based on strict investment management polices emphasizing returns on investment, continued to optimize the investment structure, and maintained a reasonable pace of construction progress of a number of projects.

For the coming year, PetroChina growth is expected to be sustained by an inelastic demand for oil and gas products of a Chinese transitional economy. The market synergy will be reinforced by the “Peak Growth in Oil and Gas Reserves” program, a program which found success in the Sichuan, Erdos and Tarim Basin, while making important discoveries at the Junggar, Qaidam and Bohai Bay Basin that offer great prospects for growth in the coming years.

Acquisitions have also improved PetroChina’s market positioning. The company acquired from ConocoPhillips interests in off-shore natural gas and on-shore Canning Basin shale gas projects in the Western Australia, all the interest held by BHP Billiton in the Browse LNG Project of Western Australia, and a part of ExxonMobil’s investments in West Qurna-1 technical service contract in Iraq. PetroChina has also announced agreements to acquire interests in Peru, and upgrades to increase output at projects in Iraq and Kazakhstan.

Most important for shareholders, PetroChina reported improvements on earnings. Full-year earnings in 2013 reached RMB129.6 billion or RMB0.71 per diluted share, against RMB115.3 billion or RMB0.63 per diluted share a year ago.

Forward Looking

Even with positive results during the first quarter of 2014, the largest shareholder, Renaissance Technologies, reduced its holding by 85%. And after an increase of over 100%, Ray Dalio (Trades, Portfolio) has become the new largest guru shareholder with a total of 37,997 shares. The position is small when compared to major shareholders at other oil and gas giants. Nonetheless, the guru has shown a will to increase his holding since the first purchase during the first quarter of 2013.

Dalio’s steady holding increase is in line with future prospects for growth, especially in the downstream and natural gas sectors. Opportunities that have been addressed by PetroChina during the last year through acquisitions and partnerships in Australia and Canada. Growth is also expected from a derived competitive market advantage. The company’s presence in the prosperous and fast-growing coastal markets is low, while taking refuge in the more relatively poor Northern regions. That has granted the firm a shield against strong foreign competitors.

Trading at 9.9 times its trailing earnings, PetroChina carries a small discount to the industry average. And stock price seems to be entering a rebound eager to recover 2011 to 2012 levels. However, some uncertainty continues to loom over future stock price, reflected by an industry's comparatively high yield. Dalio sees an opportunity, but the small position taken is indicative of the high risk associated with the stock and a strong reason to stay away from this company for the time being.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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