Challenges and Growth with Chinese Oil: CNOOC Limited (ADR) (CEO), PetroChina Company Limited (ADR) (PTR), ConocoPhillips (COP)

CNOOCThe oil market continues to develop, and China has become one of the biggest sources of consumption growth. This is in contrast to the U.S., where consumption of crude oil continues to fall. China’s heavily state-directed economy gives its oil companies an extra level of complexity. China continues to grow, but investors need to be aware of the added risks from the Communist Party.

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CNOOC Limited (ADR)
is focused on exploration and production. It has the backing of the central government, but such support can get in the way of growth.

The recent Nexen acquisition by CNOOC Limited (ADR) (NYSE:CEO) endured a difficult approval process by Canada’s government. Due to the Canadian political backlash, it appears that CNOOC Limited (ADR) (NYSE:CEO) received precious oil sands technology just before the door shut. The US Committee on Foreign Investment in the United States is equally wary of Chinese companies. CNOOC Limited (ADR) (NYSE:CEO) was forced to give up its operator status in a number of U.S. wells in order to gain American approval for the Nexen deal.

The positive side is that CNOOC Limited (ADR) (NYSE:CEO) benefits from its government connections in its assets around China. The nation needs energy and there is no way to get around this. The government’s aggressive action in the South China Sea is not positive for China’s neighbors, but it does pave the way for CNOOC to play a greater role.

Production continues to pick up in the South China Sea, Iraq, and Alberta. The firm has little debt with a total debt to equity ratio of just 0.19. CNOOC Limited (ADR) (NYSE:CEO) is a major oil company with a net production of 69.6 million barrels of crude oil and liquids in Q3 2012. At its current price to earnings ratio around 7.6, it is cheap and worthy of a second look.

PetroChina Company Limited (ADR) (NYSE:PTR) is larger than CNOOC and a very different firm. It is an integrated oil firm and operates in upstream and downstream segments.

The central government sets the prices of a number of products, including gasoline. This exposes PetroChina Company Limited (ADR) (NYSE:PTR) to losses because the cost of oil can be greater than the revenue generated from oil derived products like gasoline. Other socialist countries like Brazil have government-set gasoline prices. They have found it is a great tool to keep the populace calm and productive, one of Beijing’s main goals.

PetroChina Company Limited (ADR) (NYSE:PTR) refined 4.4% more gasoline, diesel, and kerosene in the first three quarters of 2012 relative to the same period last year. At the same time the operating loss from refining operations grew to RMB30,019 million from an operating loss of RMB11,520 million in the previous period. PetroChina Company Limited (ADR) (NYSE:PTR)’s return on investment of 8.3% is not amazing and it trades at a P/E ratio of 12.8. With the Chinese government forcing PetroChina Company Limited (ADR) (NYSE:PTR) to subsidize consumers and the firm’s high valuation, it is best ignored.

A Chinese partner

ConocoPhillips (NYSE:COP) is a minority partner with CNOOC in China and has borne some of the costs of a recent spill. Like CNOOC, ConocoPhillips (NYSE:COP) is an upstream firm. In midst of the modern resource constraints, the firm has placed a serious portion of its new developments outside of the in and outside of the U.S. It has interests in Canada’s oil sands, Malaysia, and China in addition to America’s shale assets.

ConocoPhillips (NYSE:COP) does carry some debt with a total debt to equity ratio of 0.45. It is a very large company with an expected production of 1,475 to 1,525 million barrel oil equivalents per day in 2013. The downside to being this large is that it has become increasingly difficult to find new reserves to replace old production. In addition, its upstream focus leaves it dangerously exposed to the volatility in raw crude prices. Even at a low price to earnings ratio of 8.6, the lack of downstream diversification is cause for hesitation.


Every nation is unique and China is no exception. CNOOC focuses on upstream operations. The firm has little debt and benefits from the backing of the one of the world’s few super powers.  Its ability to use the government to open up new fields in the South China Sea makes it an especially attractive firm.

PetroChina is best ignored because it is forced to sell gasoline at a government mandated loss. This is not expected to change as a cheap gasoline price is a great way for the communist party to keep the masses happy. ConocoPhillips (NYSE:COP) recently spun off its refinery operations into a separate firm. The resulting lack of upstream diversification and dependency on volatile crude prices make it a firm best left for another day.

The article Challenges and Growth with Chinese Oil originally appeared on and is written by Joshua Bondy.

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