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