With oil news playing such a large part in the movement of financial markets, record profits from oil companies and an unlimited number of pundits giving their two cents about gas prices, the savvy investor must say to himself - "How can I profit from this?"
If that same investor had found himself long China Petroleum and Chemical Corp. (NYSE:SNP) and PetroChina Company Ltd (NYSE:PTR) at the beginning of the year, he would have had his answer to the question. PTR and SNP are up 72.5% and 86.09% for the year respectively (click to enlarge):
In my own research, I came across SNP at the beg of September, when it was priced at $60.98 and my portfolio has thanked me ever since. Those currently holding these stocks may be wondering how much gas (no pun intended) is left in the tank and those on the sidelines are curious if they can achieve the same results. Before we compare the fundamentals of these companies, we should take a look at their market's potential.
China currently has 1.3 billion residents and as of Oct '05, 25.7% (about 330 million) of this population was in the 25-39 age demographic. Males in this 25-39 demographic make up 172 million of the population (13%). This age bracket is important because it will push motor vehicle sales higher in China. Both Ford and GM (despite slumping US reputations) have made concentrated pushes into China, through mulitplying dealerships, establishing their credit divisions, developing partnerships with local automakers and focusing on dealership management training. Partnerships with existing Chinese companies and trained employees at the dealerships help develop "guan-xi" - a crucial element of relational trust that is necessary for a business to survive in China.
If you look at China's GDP, it is expected to grow 10% in '07 and the consistency of FDI into the country will provide economic strength to the country and, ultimately, to those seeking entry into car ownership. Growing demand for oil worldwide, particularly from the increasing populations in Asia, along with OPEC tightening their countries' supplies also need to be considered. According to Gary Dorsch, in his article on SeekingAlpha.com, Chinese oil demand should rise 6.1% in '07. Increased presence of automakers, population and GDP growth, and rising demand for oil make for favorable market conditions.
When looking at the fundamentals of these two companies, PTR's market cap, 2nd among oil companies at 252 billion, is almost 3 times more than SNP. PTR's revenues are lower, but their cost of revenue, as a percentage, is 41%. SNP's cost of revenue, comes in at 84%! Thus, despite having lower revenues, PTR has a higher operating income than SNP.
In their respective financial ratios, PTR outclasses SNP in nearly every category (except sales growth), justifying its $50/share premium. PTR's gross margin, at 59%, is twice that of the industry (29.42%), while SNP lags behind at 14%. PTR also provides a 3.61% dividend yield, compared to SNP's dividend yield of 1.10%.
What can we conclude then? I still believe (and am maintaining my long position) in SNP. It can stand to improve its profitability and financial strength ratios (quick ratio, specifically) and it desperately needs to decrease its cost of goods sold. It has the revenues, sales growth, government backing (another subsidy was awarded to it this year), and new oil field discovery. If it can learn some lessons about expanding those operating margins, then it certainly has the capability to reach PTR's levels. If you want a dividend-paying blue chip company in a country with consistent, double-digit GDP growth and market conditions that are extremely favorable, go with PTR.
Disclosure: The author has a position in SNP.