PetroChina's hunger for deals

he two men that lead the world s second biggest listed company by market cap, PetroChina, come from very different backgrounds, but they re looking through the same lens at the energy giant s future. Aggressive overseas expansion is without doubt the order of the day, seen most recently by the joint effort with Shell to take over LNG and coal-seam gas producer Arrow Energy.
The president of PetroChina, Zhou Jiping, is a senior engineer and has 35 years working in China s oil and gas industry. He rarely gives interviews, but for the last 12 months has indicated both in press conferences and statements that the order of the day is aggressive expansion through acquisition.
The other man behind the wheel is the man Zhou took over from in the president s role Jiang Jiemin. Jiang, the president of PetroChina s state-owned parent company China National Petroleum Corp, is now chairman of PetroChina and comes from a very different background. He is a senior economist and has spearheaded China s expansion of its energy empire into overseas markets. But throughout last year, he too reiterated via Chinese state-owned media that the group isn t scared to jump into overseas markets to bolster the growth pipeline.
The long-term picture for energy prices appears to be looking healthy. Reserves keep shrinking and with structurally problematic deep-sea projects likely to be a key part of future growth pipelines, and strong demand from developing economies like China and India, taking investment positions that expose you to rising prices seems a good idea. China is currently second only to the US in terms of its energy consumption.
But China is also pursuing its own energy security agenda, which is extremely high on its list of priorities. While the Chinese government has blocked some outward-bound investment by state-owned enterprises, it has been encouraging groups to cross borders for resources. The concerted effort to start buying up international energy assets was launched with Chinese oil producer CNOOC s $18.5 billion bid for US firm Unocal in 2005. The bid was withdrawn following what CNOOC described as "unprecedented political opposition" to the offer.
Just because things went quiet for a while and Australia s eyes have been on China s appetite for metals and minerals, doesn t mean that energy security has slipped off China s radar.
But while CNOOC s chairman Fu Chengyu emphasised several times that he favours joint exploration projects over politically risky acquisitions it seems CNOOC is once bitten, twice shy PetroChina has made no such undertaking. In fact, last May it spent $1 billion in on a 45 per cent stake in refiner Singapore Petroleum, before mopping up the remaining shares, delisting it and making it a fully-owned subsidiary.
It is also possible that PetroChina s position as an energy supplier in China, and a purchaser of energy contracts, makes its buys overseas less politically sensitive. It isn t just a purchaser of projects, it is a customer of project operators.
While securing supply is important to China s national interest, so too is the acquisition of expertise. China has vast coal reserves, meaning possible coal-seam gas extraction, and the potential for this industry in China has been described as "explosive". In 2006 China extracted four billion cubic metres (BCM) of coal-bed methane and is expected to pump up to 10 BCM in 2010. However, it needs to look at best-practice and procure talent. Acquisitions like Arrow Energy will give it this knowledge.
With all of these competing interests, PetroChina appears to have a management match made in heaven Zhou has the technical expertise required to run a major gas play, while Jiang takes a bigger picture view and looks as the more strategic economic and political picture.
And while PetroChina s negative free cash flow might give some cause for concern, as well as signals from management that 2009 capital expenditure will be higher than thought, Fitch gives the company a rating of 'A+' and says that while the capex project is "demanding", it has a large bond issuance program. It also has "strong support from domestic banks and capital markets". It tapped markets several times in 2009, including a 30 billion yuan issue of three-year medium-term notes in the first quarter and another 15 billion yuan issue of five-year medium-term notes in May.
Fitch s confidence in the group, it says, is also supported by substantial proved oil and gas reserves of 21.4 billion barrels of oil equivalent, good production scale and reserve life of 18 years, and a three-year proved reserve replacement ratio of 156 per cent, which compares favourably with international oil majors in the AA category , according to a note issued in mid-2009.
There are suggestions emerging in the Australian marketplace that AGL might be next on PetroChina s list, if the Arrow takeover is a success. While this hasn t been explicitly expressed by the company, Australia s proximity to China and comparably transparent foreign investment regulations make it a likely hunting ground for acquisition targets.