As the price of oil spirals hovers below $100 per barrel, investors have focused their attention on the companies pumping that "black gold" out of the ground, and their ability to keep it coming.
Although many of the large, international oil companies boast enough reserves to maintain or even increase their output for years to come, it is an unavoidable fact that the vast majority of the world's oil is controlled not by ExxonMobil and Chevron, but instead by government-owned national oil companies.
Once regarded as merely a revenue collection arm of the government, national oil companies have changed significantly in recent years. Some have even developed a level of operational expertise that that rivals their investor-owned competition. Several have also been partially privatized, listing their shares on stock exchanges around the world.
On November 6, shares of PetroChina Co. (PTR; S&P investment rank, 4 STARS, buy; $200)—the largest oil company in China and 85% held by the Chinese government—more than doubled when they debuted on the Shanghai Stock Exchange, giving the company a nominal market capitalization of more than $1 trillion. The enthusiasm for shares in a national oil company is hard to miss.
"We favor PetroChina for its position as China's largest integrated oil company," says Lorraine Tan, a Standard & Poor's equity analyst in Asia. Tan thinks that PetroChina shares will trade at a higher earnings multiple than other large oil companies thanks to its "leading position in the fastest growing market for energy."
China's Privileged Companies
PetroChina, and other national oil companies, benefit from several advantages that international oil companies do not have. Like many national oil companies, PetroChina dominates its domestic market, which gives it the power to operate effectively during good times and bad. Already the largest oil producer in China, PetroChina also benefits from a government policy that gives it the right to take a 51% interest in any commercially-viable oil discovery made in China, though it can choose to take a smaller stake.
China's two other major, state-owned oil companies, China Petroleum & Chemical Corp. (SNP; 4 STARS; $132), commonly known as Sinopec, and China National Offshore Oil Corp. (CEO; 5 STARS, strong buy; $179), enjoy the same privileges, as do national oil companies in many other countries.
StatoilHydro (STO; 5 STARS, strong buy; $34), which is 62.5% owned by the Norwegian state and whose shares trade in Oslo and on the New York Stock Exchange, receives no direct benefit from the government, says S&P equity analyst Christine Tiscareno. Its legacy, however—it was formed through the merger of two privatized state oil companies, Statoil and NorskHydro—has left it with a commanding position in Norway's offshore oil fields. Norway was the third largest oil exporter in the world in 2006, after Saudi Arabia and Russia, and ahead of Iran.
Statoil "is the most active exploration company in Norway, which is reflected in its participation in 90% of the wells drilled in the Norwegian Continental Shelf in 2006, half of those as operator," Tiscareno says.
New Projects
National oil companies are often able to gain access to new, highly sought after projects by coordinating foreign-aid packages, something the international oil companies are unable to offer. India's Oil and Natural Gas Corp., which is 74% owned by the Indian government, got some help with its efforts to start production in Nigeria last month. The Indian government announced it would give the Nigerian government a $900 million grant to help implement a number of trade and investment agreements the two countries have signed recently.