A major shift is happening in the energy world. After years of wearing the production crown, venerable Exxon Mobil (NYSE:XOM) will have to settle for second place. In just over a decade after the Chinese government created PetroChina (NYSE:PTR) to procure more oil for the country’s booming economy, it has moved into the top spot. Over the long run, it may not matter who’s No. 1 or No. 2, but the place setting is certainly indicative of PetroChina’s aggressive acquisition campaign.
That full-court buying binge is exactly why shares of the Chinese firm should warrant more attention from investors. While Exxon will continue to be one of the largest integrated energy concerns and isn’t going away anytime soon, PetroChina may offer a higher growth proposition among the world’s major oil companies. For investors, adding a stake in the Chinese firm could prove profitable over the long term.
John Rockefeller’s ghost is most likely shaking his head in disapproval at the current turn of events. As a descendant of Rockefeller’s Standard Oil, Exxon has traditionally been the sector’s production leader. However, that all changed with PetroChina’s latest annual report. China’s biggest oil company pumped nearly 2.4 million barrels of crude a day last year, or about 100,000 barrels a day more than Exxon. Overall, the Asian oil major saw its production grow by more than 3.3% during 2011.
That’s a sharp contrast to Exxon’s 5% decline in production for 2011. More important was PetroChina’s longer-term outlook. Reuter’s reports that the firm’s production growth forecast for 2012 was still strong when compared with other global oil majors. By comparison, despite Exxon’s record-setting capital spending, it reported that production for 2012 would fall an additional 3%.
Exxon’s output slide highlights a huge concern for a variety of major energy firms. Like Exxon, Chevron (NYSE:CVX), BP (NYSE:BP) and Royal Dutch Shell (NYSE: RDS-A, RDS-B) all reported producing less crude oil last year than previously. The main culprit: Many majors are struggling to tap new sources of oil fast enough because large fields are rarer and more costly. When this happens, energy companies become stuck with aging fields that have declining output.
A Big Backer
However, a major fundamental difference has allowed PetroChina to overcome many of the problems with declining production that Western oil firms face: Deep government pockets. Like other major powerhouses in the Chinese economy, PetroChina is a state-owned enterprise. In this case, Beijing controls 81% of the company, and its mandate is a simple “find all the oil you can.”
Those instructions involved overhauling the woeful domestic energy landscape in China. The firm has grown by pumping every last drop it can get from its aging domestic reserves. Several fields date back to the beginning of the Chinese communist government in the 1950s. This commitment to the aging oil patch is certainly in stark contrast to many other integrated majors. While some, like Apache (NYSE:APA) have specialized in applying advanced technology to breathe new life into depleted oil fields, many others — including Exxon — end up selling or retiring these wells.
Ancient fields aside, PetroChina has been using its government checkbook to its advantage. The firm has undertaken a major global asset acquisition spree. According to mergers and acquisition data provider Dealogic, PetroChina’s purchases have totaled $7 billion since 2010. That’s about twice as much as Exxon. These include assets in Iraq, Australia, Africa and, yes, North America. The company’s latest buy is 20% stake in a shale gas project in Canada from Shell.
However, PetroChina isn’t stopping there. Over the next 10 years, it plans to invest at least $60 billion in global oil and natural gas assets to increase the share of overseas output to half of its total. Speaking to reporters in Hong Kong during the company’s earnings announcement, Chairman Jiang Jiemin said, “We will buy assets on a large scale.”
What’s an Investor to Do?
PetroChina’s production rise can be seen a cautionary tale for investors in the energy patch. After all, China will always take care of China first. The firm’s state backing helps underscore that fact — and the nation consumes every barrel PetroChina produces.
The problem for Big Oil stems from that fact that PetroChina, along with CNOOC (NYSE:CEO) and its other Chinese petroleum brethren, are willing and able to pay well above the industry average to get those deals done. Ultimately, in its quest to secure resources, China could make it tougher for oil majors to produce good returns for their shareholders. Firms like Exxon will have to outbid the Chinese to keep production from dying.
However, investors don’t have to sit idly by. I wouldn’t sell my Exxon or Shell shares just yet, but adding a stake in China’s major energy concern could be a good idea. PetroChina’s ADRs currently trade for a moderate price-earnings ratio of 12.26 and yield a healthy 3.2%. So far this year, shares have risen around 13% compared with an only 2% gain for Exxon.
Overall, the fact that PetroChina has been hitting its production targets faster than Exxon makes it more of a growth element in a portfolio, and it could be a nice complement to the traditional oil major.