S&P says state-owned petroleum outfits like top-rated CNOOC and StatoilHydro offer investors unique advantages
From Standard & Poor's Equity ResearchAs the price of oil spirals hovers below $100 per barrel, investors have focused their attention on the companies pumping that "black gold" out of the ground, and their ability to keep it coming.
Although many of the large, international oil companies boast enough reserves to maintain or even increase their output for years to come, it is an unavoidable fact that the vast majority of the world's oil is controlled not by ExxonMobil and Chevron, but instead by government-owned national oil companies.
Once regarded as merely a revenue collection arm of the government, national oil companies have changed significantly in recent years. Some have even developed a level of operational expertise that that rivals their investor-owned competition. Several have also been partially privatized, listing their shares on stock exchanges around the world.
On November 6, shares of PetroChina Co. (PTR; S&P investment rank, 4 STARS, buy; $200)—the largest oil company in China and 85% held by the Chinese government—more than doubled when they debuted on the Shanghai Stock Exchange, giving the company a nominal market capitalization of more than $1 trillion. The enthusiasm for shares in a national oil company is hard to miss.
"We favor PetroChina for its position as China's largest integrated oil company," says Lorraine Tan, a Standard & Poor's equity analyst in Asia. Tan thinks that PetroChina shares will trade at a higher earnings multiple than other large oil companies thanks to its "leading position in the fastest growing market for energy."
China's Privileged Companies
PetroChina, and other national oil companies, benefit from several advantages that international oil companies do not have. Like many national oil companies, PetroChina dominates its domestic market, which gives it the power to operate effectively during good times and bad. Already the largest oil producer in China, PetroChina also benefits from a government policy that gives it the right to take a 51% interest in any commercially-viable oil discovery made in China, though it can choose to take a smaller stake.
China's two other major, state-owned oil companies, China Petroleum & Chemical Corp. (SNP; 4 STARS; $132), commonly known as Sinopec, and China National Offshore Oil Corp. (CEO; 5 STARS, strong buy; $179), enjoy the same privileges, as do national oil companies in many other countries.
StatoilHydro (STO; 5 STARS, strong buy; $34), which is 62.5% owned by the Norwegian state and whose shares trade in Oslo and on the New York Stock Exchange, receives no direct benefit from the government, says S&P equity analyst Christine Tiscareno. Its legacy, however—it was formed through the merger of two privatized state oil companies, Statoil and NorskHydro—has left it with a commanding position in Norway's offshore oil fields. Norway was the third largest oil exporter in the world in 2006, after Saudi Arabia and Russia, and ahead of Iran.
Statoil "is the most active exploration company in Norway, which is reflected in its participation in 90% of the wells drilled in the Norwegian Continental Shelf in 2006, half of those as operator," Tiscareno says.
National oil companies are often able to gain access to new, highly sought after projects by coordinating foreign-aid packages, something the international oil companies are unable to offer. India's Oil and Natural Gas Corp., which is 74% owned by the Indian government, got some help with its efforts to start production in Nigeria last month. The Indian government announced it would give the Nigerian government a $900 million grant to help implement a number of trade and investment agreements the two countries have signed recently. In return, Nigerian officials are expected to give final approval for ONGC to begin work on one of two exploration blocks it had been previously awarded. That award, now being reviewed, was one of many made under a previous government, and the aid package allowed ONGC to avoid months of delays.
Governments are also able to help their national oil companies in other ways. OAO Gazprom, which is majority-owned by the Russian state and enjoys a monopoly on all Russia's gas exports, is a highly profitable company and strongly supported by the Russian government. However it has run up a large debt load financing acquisitions and new projects. Interest costs are a major expense for Gazprom, but they would be a lot costlier were it not for the government's implied backing of Gazprom's debts. Standard & Poor's Ratings Services (which operates independently of S&P Equity Research) awards Gazprom two additional notches in its credit rating for the government's backing, enabling it to have an investment grade rating, currently BBB (Stable). On a standalone basis, it would be rated BB+, a speculative grade, and the cost of servicing roughly $28 billion in debt would be much higher.
Brazil's national oil company, Petroleo Brasileiro (PBR; 3 STARS, hold; $117), also known as Petrobras, has benefited from its government ownership. This has allowed it to maintain a close relationship with Venezuela's President Hugo Chavez, who has repeatedly clashed with international oil companies operating in the country. Chavez and Brazilian President Luiz Inacio Lula da Silva signed an agreement in October to set up two joint ventures between Petrobras and the Venezuelan national oil company, Petroleos de Venezuela (PdVSA). So close are their relations that Chavez offered Petrobras the chance to help jumpstart development of Venezuela's natural gas industry by taking control of the offshore Mariscal Sucre project. The project was previously awarded to Royal Dutch Shell and Mitsubishi, but Chavez terminated their agreement in 2005 in favor of Petrobras.
National oil companies do suffer from several important disadvantages from their state affiliation as well. PetroChina and Sinopec may be forced to subsidize domestic fuel consumption or pay out funds as dividends that might be more profitably reinvested in its operations. Furthermore, their national affiliation may prove a hindrance when operating overseas: PetroChina was forced to abandon its proposed $18 billion acquisition of Unocal after objections from the U.S. Congress.