Should We Buy the PetroChina Stock Warren Buffett Sold?

First of all, let me say that I think Warren Buffett’s investment in PetroChina (PTR) was probably one of the most impressive bets he has ever made. Before China or energy were hot commodities he found a company that was emblematic of both and turned a $488 million investment into $4 billion, an astounding 700%+ return in five years. I’m not sure where that ranks among his all-time best investments (Buffett experts, please let us know), but it is surely his best in recent memory.

Buffett sold his PTR stake in the 150’s, after which the stock soared to above $260 per share. China’s market has since dropped precipitously, and PetroChina shares now sell for around $120 each. Despite Buffett’s decision to exit the stock (20% above current levels), I think PetroChina looks like a good investment today.

Before I get into why I think so, let me share what Buffett had to say about his PTR investment in his recently released annual letter to shareholders:

“We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for $488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the company was worth about $100 billion. By 2007, two factors had materially increased its value; the price of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas reserves. In the second half of last year, the market value of the company rose to $275 billion, about what we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion. A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours.”

First of all, the paragraph quoted above tells us that when Buffett says his desired holding period for an investment is “forever,” that is not entirely true. He buys a stock that he feels is undervalued, and when it reaches fair value in his mind, as PTR did, he sells it. I think any investor trying to outperform would be advised to do the same.

Now, there are some interesting things about this story to mention. When Buffett started buying PetroChina the price of crude oil was $25 per barrel. He tells us in his letter that at that time he felt the stock was worth about 1.7 times its actual market price, or $100 billion.

If we use his own valuation and simply adjust it to reflect higher oil prices, we can determine an approximate value for PTR right now. Oil trades at $100 per barrel today, so that implies Buffett’s valuation model gives PTR an intrinsic value of $400 billion, or $223 per share.

Now, you might ask if that math should be trusted why would Buffett choose to sell last year for only $150 per share? Well, it just so happens that crude oil was trading at $70 per barrel when Buffet sold PTR. Since then oil prices have jumped another 50%, which would imply that had he used a $100 oil price assumption, Buffett’s fair value for PTR would be about $225 per share. Pretty darn close if you ask me.

So, did Buffett sell PetroChina too early? Well, that depends on how you view the energy landscape. If you think that energy prices are in “bubble” territory and are overvalued at current prices, then he probably got out at a great time. However, if you are like me and think the bull market in commodities (including energy) has a lot of time left to go which could push crude oil to $150 or more in coming years, then yes, Buffett left a lot of money on the table that investors can now take for themselves. After all, PTR trades at $122 per share right now, about 80% below Buffett’s own fair value calculation if you believe oil prices stay elevated long term.

Full Disclosure: Long shares of PetroChina at the time of writing

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5 Thoughts on “Should We Buy the PetroChina Stock Warren Buffett Sold?

  1. it is very good math. I am not an expert but I have one question.

    How does taxation of oil company in China work? If it is something like Russian taxation of oil company the math is fully mistaken.

  2. I agree with your basic analysis, but don’t you need to adjust the valuation for the reserves of PTR in 2002 vs 2008? I haven’t looked into the issue, but if proven and probable reserves have gone down, then PTR’s valuation per barrel would be affected. Also, production costs have gone up. So its not as simple as saying, oil went up by 4x, so mkt cap should go up 4x.

  3. Chad Brand on March 24, 2008 at 10:01 AM said:

    klug – I am not overly familiar with corporate taxes in China, so I can’t comment on their tax policies versus a country like Russia.

    ilan- You are right that my math is not exact and it was not meant to be. I don’t know how Buffett chose to value PTR, but energy stocks are typically valued on an “NPV of reserves” basis, so you are right that it is not as simple as I made it seem. I’ve seen NPV estimates as low as 170 per share on PTR… below my numbers in this example, but well above current prices. The main variable assumption is oil price, as that is far more volatile than changes to reserves.

  4. Anonymous on March 25, 2008 at 5:49 PM said:

    The chinese government is imposing fixed prices on gasoline which is impacting the earnings of Petrochina. I don’t think you can come up with a valuation without taking that into account. Even if crude prices do go to $150 per barrel there is no guarantee that PTR will reap the full impact of that. They are certainly not as profitable as they could be with the current price setting.

  5. Remember Buffet buys them at 30% discount. Lets say that Buffet thought the business was worth $275B. At a 30% discount that would set an entry target at a market capitalization in the low $190s at a price of That would place the purchase somewhere near 100$ – 105$ per share range.

    Also, PTR is a play on really 2 things: 1.Big oil companys, they have been getting dragged out behind the shed and shot. I hope they continue to pump lead in them and PTR is quilty by association.
    2. They are a China play, the whole china thing has been getting KO’ed also. Several things play into this. Things such as inflation in China, speculative bubbles regarding the shanghai indexes and speculation on growth slowing down.
    The more these things get talked about the more PTR takes it in the face and the more I like it.

    Bottom line is that I think it is a bit early to consider PTR. I would like it closer to 100. But we’ll see.

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