PetroChina: A Surprisingly Solid 7% Yield Ruined By Too Much Geopolitical Risk
Summary
- Whilst income investors often turn to the household oil and gas names like BP, other less known companies like PetroChina still offer investors a high 7% dividend yield.
- Despite the turmoil of 2020, their operating cash flow only decreased around a modest 11% year-on-year, and improving operating conditions should help their dividend coverage in the future.
- They have a very healthy financial position with both very low leverage and very strong liquidity, although the latter comes about because they are a state-controlled company.
- This poses one big problem for foreign investors since it creates very high geopolitical risks, which have already seen their sister oil and gas company, CNOOC, delisted from the NYSE.
- Whilst their fundamentals are surprisingly solid, disappointingly there is too much geopolitical risk and thus I only believe that a neutral rating is appropriate.
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Introduction
Whilst the household names in the oil and gas industry such as BP (BP) receive the most interest from income investors, when looking across towards the East, there are other less thought-about options available, such as the aptly named PetroChina (PTR) that resides in China. Whilst they sport surprisingly solid fundamentals for a company with a high 7% dividend yield, sadly their appeal is essentially ruined by too much geopolitical risk that takes their shares off the table.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
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*There are significant short and medium-term uncertainties for the broader oil and gas industry; however, in the long-term, they will certainly face a decline as the world moves away from fossil fuels.
Detailed Analysis
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Instead of simply assessing dividend coverage through earnings per share, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact on their financial position. The extent that these two results differ will depend upon the company in question and often comes down to the spread between their depreciation and amortization to capital expenditure.
When considering the severe downturn of 2020 that ravished the oil and gas industry, their cash flow performance was actually surprisingly solid with their operating cash flow of ¥318.6b only down a modest 11.41% year-on-year from their previous result of ¥359.6b during 2019. To provide context, BP saw their operating cash flow crash by over 50% year-on-year during 2020, as per my other article. Whilst the ¥21.5b of free cash flow this produced was still insufficient for PetroChina to adequately cover their dividend payments of ¥28.1b during 2020, given the extent of the downturn that at one point even saw negative oil prices, this gap is not concerning, especially with their results subsequently improving during 2021.
Throughout the first half of 2021, their operating conditions improved as oil prices recovered and naturally so did their operating cash flow, which increased an impressive 46.73% year-on-year to ¥116b versus its equivalent result of ¥79.1b during 2020. This should help boost their dividend coverage to adequate levels in the future and thus relieve the slight pressure that was placed upon their financial position during the downturn of 2020.
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Whilst the recent news surrounding the extremely overleveraged Evergrande (OTC:EGRNF) (OTC:EGRNY) may have cast Chinese companies in a somewhat negative light from a financial health perspective, thankfully their capital structure tells a different story. It shows that their equity of ¥1.393t towers well above their net debt of ¥228.3b, which has not materially changed since the end of 2017, and importantly, it also indicates that their financial position is very healthy.
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Thankfully, their financial metrics confirm that their financial position is very healthy, as primarily evidenced through their net debt-to-EBITDA of 0.56 and net debt-to-operating cash flow of 0.70, both sitting easily within the very low territory of under 1.01. Thankfully, this very positive situation requires little explanation and shows that whilst Chinese property developers like Evergrande have become overleveraged, thankfully, not every Chinese company shares this undesirable trait. When combined with their cash flow performance, this makes for a very uncommon and surprisingly solid high dividend yield, if not for one big problem.
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When looking at their liquidity, there are clearly no reasons to be concerned with their current and cash ratios of 0.91 and 0.26 respectively. Their liquidity will likely remain very strong simply because they are a massive company that is controlled by the same entity that also controls the central bank of its homeland, which actually leads to the one big problem with this otherwise surprisingly solid high yield dividend investment.
Since they are a Chinese state-controlled company, all other shareholders take a backseat to the goals of the Chinese Communist Party and President Xi Jinping. Whilst this has not necessarily proven too problematic from a financial standpoint during previous years, as evidenced by their solid cash flow performance during the downturn of 2020, other geopolitical risks remain far more important.
Following the recent years, all investors should know that the relations between Western nations and China are under particularly high strain. This has already seen roadblocks imposed for investors of their sister oil and gas company, CNOOC (CEO), which was delisted earlier in 2021 from the New York Stock Exchange due to its government-directed offshore operations in disputed basins. During this time, there have been seemingly countless news stories and political analysts voicing concerns that a new cold war is either brewing or even more worryingly, possibly already underway.
This background geopolitical environment creates significant risks of both sides taking actions against the other, which could easily continue to derail cross-border investments in the medium to long term. Whilst I nor anyone else can accurately predict exactly how this situation will transpire but it should be remembered that China has an authoritarian government, which very well may not end up being friendly to foreign investors if the walls continue going up, figuratively speaking. Even though it remains a subjective opinion, I see few reasons to expect the relations between the West and the East to improve materially anytime within the short to medium term, which heavily impacts the desirability of cross-border investments.
Conclusion
Whilst their fundamentals are surprisingly solid for a company that is sporting a high 7% dividend yield, disappointingly, their shares remain off the table for many investors outside of China, such as myself. This ultimately means that I only believe a neutral rating is appropriate because their appeal is ruined by too much geopolitical risk that will likely continue suppressing their share price.
Notes: Unless specified otherwise, all figures in this article were taken from PetroChina's SEC filings, all calculated figures were performed by the author.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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