It was a dozen years ago that Jim O’Neill, the recently retired head of Goldman Sachs‘ money management arm, coined the term BRICs. It was simply an acronym for Brazil, Russia, India, and China (NYSE:SNP), the four developing nations that were then expected to lead the world’s economic growth well into the future.
But the foursome has fallen far short of those expectations. As The Wall Street Journal noted just last week, O’Neill says now that only China has come close to meeting the once heady expectations for the group.
Still going strong?
Assuming the big country meets the 7.5% growth rate that’s generally expected of it in 2013 — major slippage from prior years, but far better than the 1.5% improvement that’s likely to be coaxed out of the U.S. — it could nudge the combined BRIC growth rate toward intermediate-term expansion of about 6.6%. That’s well below the 8.5% for the past decade, but hardly chopped liver.
A key consideration then becomes the existence of meaningful investment opportunities in the countries. India is the most economically downtrodden right now. Indeed, as Derick Irwin of Wells Fargo Advantage Funds was quoted by the Journal as saying not long ago, “India is not an investible economy right now.”
And while my druthers for playing the BRICs lie in the energy sector — several big public companies have sallied forth from the countries to ply their trade internationally, thereby spreading their geographic and geologic exposure — I’d eliminate Brazil’s once beloved Petrobras for now.
The Brazilian economy is a shadow of its former self, with likely growth of 2% for the next couple of years providing a meager contrast to the 7.5% the country achieved in 2010. And while discoveries in the pre-salt Santos Basin had the world atwitter not long ago, the realities of sky-high production costs tied to the technologically challenging venue have played a big role in the pummeling of Petrobras’s shares during the past 18 months.
A Chinese threesome
Turning to China, my inclination is to examine the trio of CNOOC Limited (ADR) (NYSE:CEO), PetroChina Company Limited (ADR) (NYSE:PTR), and Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), in that order. CNOOC is China’s largest offshore producer, with core operations in Bohai Bay off the country’s coast, the China Sea, and the East China Sea. It also works in Australia, Nigeria, Uganda, Argentina, Canada, and the U.S.
In February, it spent $15.1 billion to buy Canada’s Nexen, then that country’s second-largest oil company. In the process, it gained operations in the North Sea, the U.S. Gulf of Mexico, and West Africa. It earlier had formed a partnership with Chesapeake for a one-third interests in the Oklahoma City company’s sizable positions in the Niobrara play of Colorado and Wyoming and the prolific Eagle Ford.
Despite its broad international swath, a healthy 3.70% forward annual yield, and a 32% operating margin, CNOOC Limited (ADR) (NYSE:CEO)’s forward P/E multiple is just 7.4 times.
PetroChina Company Limited (ADR) (NYSE:PTR) is the largest of the lot, with a $205 billion market capitalization. It’s more operationally diverse than CNOOC Limited (ADR) (NYSE:CEO), with segments that span exploration and production, refining and chemicals, marketing, and pipelines.
PetroChina Company Limited (ADR) (NYSE:PTR) is acquiring more than half of ExxonMobil‘s interests in Iraq’s West Qurna-1 field, which may or may not be a good thing. And, in a joint venture with Royal Dutch Shell, its considering constructing an LNG facility in Australia.
The company provides a 3.50% forward dividend yield. But while its operating margin is barely a quarter of CNOOC Limited (ADR) (NYSE:CEO)’s, it’s forward P/E is 8.6%. That said, I’d rather own the Hong Kong-based offshore company.
My conclusion is similar vis-a-vis a comparison between Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) and CNOOC Limited (ADR) (NYSE:CEO). The former on Monday reported a more than 24% year-over-year earnings increase for the first half of 2013. And while its forward yield is a compelling 5.90%, its operating margin, at 3.6%, is about a ninth of CNOOC’s. In part for that reason, its forward P/E is just 6.2%.