John D. Rockefeller once said: “Do you know what really makes me happy? Dividends arriving in my bank account.”
The American billionaire, who died in 1937 after building a mammoth oil empire, was spot on with regard to investment philosophy.
From the long-term perspective, companies that pay stable dividends usually offer the best investment returns.
A study of S&P 500 index constituents from 1980 to 2004 showed that dividend-paying stocks offered annual return of 14.86 percent, while others yielded less, at 12.22 percent.
In this context, it is worth looking at Chinese oil giant PetroChina Co. Ltd. (00857.HK).
Ahead of the Chinese New Year holidays, the market had been rife with rumors about possible consolidation or restructuring of the mainland’s oil firms.
One option being studied by a team of advisers was said to involve combining China National Petroleum Corp. (CNPC) and China Petrochemical Corp. (Sinopec, 00386.HK). Other options laid out included a merger of two other major energy companies, China National Offshore Oil Corp. (CNOOC)(00883.HK) and Sinochem Group.
Also, China is expected to further hike the retail prices of refined oil soon by at least 300 yuan per metric ton. That would mark the second increase so far this year, which would benefit both CNPC and Sinopec.
PetroChina, the listed arm of CNPC, has seen its domestic stock price soar over 50 percent since December. The energy giant has benefited from an overall valuation recovery in A-shares as well as a focus on index heavyweights by major investors. However, the share price may not fully reflect the real impact of oil price halving from US$100 to US$50 per barrel.
Chinese oil companies may need to bid farewell to the era of windfall profit as crude oil price slumps. And PetroChina has to improve profit and efficiency through cutting back capital expenditure.
The company is expected to slash crude oil production this year, in particular output from high-cost fields like Daqing. That would help the company lift its upstream profitability.
Low oil price will also squeeze the middle and downstream profits. Therefore, PetroChina may speed up its mixed-ownership reform in pipeline and asset divestment. That would benefit the stock price.
Meanwhile, its natural gas sales business to downstream sectors may struggle to maintain high prices this year due to competition from liquified petroleum gas, even as upstream import costs would remain at same level.
Prices of spot liquefied natural gas and substitute energy have been falling sharply across the world. And it’s very complex to change long-term contracts. Therefore, stepped up natural gas production may not necessarily boost the company’s bottom line.
All that said, PetroChina may continue to keep strong cash-flow and dividend payout, while also potentially capturing mergers and acquisitions (M&A) opportunities amid the price crash in primary energy trading market.
That is why the stock remains a good bet for long-term investors.
This article appeared in the Hong Kong Economic Journal on Feb. 26.
Translation by Julie Zhu
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