Oil

In case you haven't heard, PetroChina's share price increased 163% by close on Monday on the Shanghai Stock Exchange. What does this mean? Well it depends what you're reading.

People's Daily announces that PetroChina is now the world's most valuable company with a market value over $1 trillion, more than double the $487.7 billion value of ExxonMobil, now the world's second most valuable company. Curiously, the article offers no explanation, just a mention, that the Shanghai Composite Index slid 2.48% on the same day. Could this be the result of the numerous day traders trying to get their hard earned yuan into PetroChina?

The Economist Online urges readers to take the news of the oil giant's value with a grain of salt. They ask readers to consider the actions of Warren Buffett who had Berkshire Hathaway invest $488 million in PetroChina four years ago, and pull out their investment just prior to PetroChina's public offering. The Economist suggests that PetroChina is floating on two bubbles which make the company a liability to investors:

• The oil bubble which is due to deflate as high oil prices depress economic activity. Also, PetroChina's domestic fields are in decline and their new resources are coming from troubled regions, such as Sudan.
• The stock bubble in China which is reflected in the price/earning ratios of Chinese companies. PetroChina itself is valued at 20x earnings in New York and Hong Kong.

Economist also points out that as of November 6, PetroChina surely hurt some day traders as share price had dropped 18% from the opening day's close. But, they also say that day trading is the only proper strategy in a stock bubble.

The Wall Street Journal regards all of this most valuable company in the world talk as a bunch of hogwash. They rely on a variety of numbers. Regarding market capitalization of $1.08 trillion, WSJ says that this figure was arrived at by apply the closing price of the shares on the Shanghai Index of 43.96RMB ($5.90) to every outstanding share of PetroChina. The problem is that only 2.2% of PetroChina's share capital was was sold in the IPO. The Shanghai Index is in a well-known bubble, so WSJ asks the reader to instead apply PetroChina's share price on the Hong Kong market, 18 Hong Kong dollars ($2.32), to the all outstanding shares which results in a market capitalization of $424 billion, about $60 billion less than Exxon Mobil.

WSJ reminds us that 86% of PetroChina's shares are still held by the SOE parent company, and are difficult to value because it is hard to guess what price they would fetch on the open market. WSJ says that in light of the limited market of Class A shares we could instead value PetroChina based on their freely traded shares, $72.5 billion.

Another option for comparing the value of the companies offered by WSJ is to compare oil production. PetroChina produced 1.06 billion barrels of oil last year and Exxon Mobil produced 1.56 billion barrels of oil.

WSJ's final method of valuing the companies is to compare income streams. PetroChina's revenue was $91.9 billion and their net income was $19 billion last year. Exxon Mobil's revenue was $365.5 billion and their net was $39.5 billion.

I think that the Shanghai Daily makes the best sense out of PetroChina's value, especially in comparison with Exxon Mobil, in a statement taken from Orient Securities analyst Wang Jin:

"The A-share market is a bit special, so the largest market cap doesn't necessarily mean anything," Orient Securities analyst Wang Jin said. "For mainland investors, it makes more sense to value PetroChina based on its profitability."