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Collection: Warren Buffett - #327 'PetroChina and the Margin of Safety'



She wants to know what you think about PetroChina. (Laughter)


It’s funny. I saw her out there in the shopping area and I knew that she had PetroChina on her mind. (Laughter)

We bought PetroChina a few years ago, again, after reading the annual report. And fortunately it was in English.

It was the first stock — Chinese stock — and really the last.

I mean, it won’t necessarily be the last, but it’s the only one that we’ve owned so far. We put about $400 million into it.

At the time, and still, it produces about 3 percent of the world’s oil, which is a lot of oil. It produces, probably, 80 percent or so as much as Exxon Mobil will produce. And it’s a huge company.

Last year it earned $12 billion. Now, if you look at the Fortune 500 list, my guess is you won’t find more than about five companies in the United States that earn $12 billion or more. So it’s a major company.

At the time we bought it, the total market value was 35 billion. So we bought it at about three times what it earned last year. It does not have unusual amounts of leverage.

It — in the annual report, they say something which very, very few companies do say, but which I think is actually fairly important. They say they will pay out about 45 percent of the amount they earn.

So, if you can buy it at three-times earnings, what turned out to be three times earnings, and you get 45 percent of 33 percent, you know, you’re getting a 15 percent yield on your — cash yield — on your investment.

It’s a very good annual report. Chinese government owns 90 percent of the company. We own 1.3 percent. If we vote with them, the two of us control the business. (Laughter)

It’s a thought that hasn’t occurred to them, but I’ll keep pointing it out. (Laughter)

But it’s, you know, it’s a very major business and a very, very attractive — at what was a very attractive price.

Unfortunately, the government shares and our shares have the same economic interest but they are classified differently, so that the government’s 90 percent are called one thing and the 10 percent with the public are called A-shares.

And we have to report in Hong Kong when we own 10 percent of a company — or we did then — 10 percent of a company shares, so unfortunately the 10 percent applied only to the 10 percent of A-shares and so we had to reveal our ownership when we only had 1 percent of the economic interest in the company.

So, we would have bought more but the price jumped up, and we are happy to have our 1.3 percent or whatever it is, and we think that they’ve done a good job in running the business.

They’ve got large gas reserves, which they’re starting to develop now.

But it’s a very major enterprise. Employs almost 500,000 people.

And the interesting thing was, a few years ago relatively few people in the investment world probably even thought about the fact that PetroChina was over there and was a much larger business than most of the — well, just about any oil company in the world, except for BP and Exxon Mobil.

Charlie, do you have thoughts?


Yeah. It would be nice if this sort of thing happened all the time, but that hasn’t been true in recent years.


But we never — I should emphasize — I mean, the annual report of PetroChina, which, like I say, it’s easy to read. Understandable. They declare their policies. Anybody could get it. You can read it.

We did not — we did not go over and — we never had any contact with the management before we bought the stock. We’d never attended an investor presentation or anything of the sort.

I mean, it’s right there in black and white, in a report that anybody can get.

And we just sit in the office and read those things, and we were able to put 400 million out that’s now worth about a billion-two or something like that.

It was interesting. At the time — I think I’m right on this — at the time, Yukos, which is the big oil company in Russia, was probably far better known among the investment community in the United States than PetroChina.

And I compared the two. At the time, thought to myself, would I rather have the money in Russia or in China? PetroChina, in my view, was far cheaper. And I felt that the economic climate was likely to be better in China, you know.

Would I have — if it had been selling at the same multiple as a U.S. domestic company, would I have regarded it as more attractive? No.

I mean, there’s some disadvantages, always, to being in a culture that you don’t perfectly understand, or where tax laws can change, your ownership rules can change.

But the discount at which PetroChina was selling, compared to other international oil companies, was, in my view at the time, ridiculous. So, that’s why we bought it.

And we will have the candy available for you at the break.

Number 6.


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