Monday, December 12, 2005

PetroChina

We bought it a few years ago, investing $400 million. It was my first investment in a Chinese stock.

I read the annual report. They produce 3% of the world's oil, about 80% as much as Exxon Mobil. Last year, it earned $12 billion in profit - only maybe five US companies earned as much last year.

The total market value when I bought it was around $35 billion, so I paid only three times last year's earnings. The company does not have unusually large amounts of leverage and - this is unusual - has a stated policy of paying out 45% of its earnings in cash, so that's a 15% cash yield [based on last year's earnings, since Berkshire bought it at 3x those earnings].

The Chinese government owns 90% and we own 1.3%, so if we vote with them, together we control the business. (Laughter)

Unfortunately, we don't own the same shares [as the Chinese government]. [We own another class of shares such that] we had to report our interest [in the company] at 1.3%. We would have liked to buy more, but the price jumped up [after our ownership stake was disclosed].

Munger: It would be nice if this [finding really cheap stocks] happened all the time. Unfortunately, it doesn't.

Buffett: I simply read the annual report. I had no contact with management nor did I attend any management presentations. I just sat in my office and invested $400 million, which is worth $1.2 billion today.

I also looked at Yukos, the big Russian oil company [at the time I bought PetroChina] and compared the two at the time. PetroChina was far cheaper and I thought the economic climate was likely to be better in China. Yes, there was risk of tax laws or ownership rights changing, but the price was ridiculous.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

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