Some Notes This Morning: PetroChina (PTR), buybacks

1) PetroChina (PTR) is up another 10% this AM as the market capitalization now crosses over $430 Billion, and makes it the 2nd most valuable company in the world! I talked about this name this weekend in "Shanghai the Mystical Land of Premium Valuations". I still assume this run is solely due to the fact it is going to be listing on the Shanghai exchange which I guess makes every company worth more (how silly). This Reuters article points to "hopes of new discoveries" driving the stock. The stock is now up a whopping 60% since September - again I never thought a mega cap stock could make such a move in such a short amount of time, but apparently we are once again in a time of 'new paradigms'.

• HONG KONG, Oct 15 (Reuters) - Shares of Asia's top oil and gas company, PetroChina Co Ltd (PTR), jumped 13 percent on Monday as news of increased production and hopes of major new discoveries spurred optimism about its performance in the fourth quarter.
• The share surge to an all-time high of HK$18.94 gave the state-backed energy producer a market value of as much as US$430 billion, outpacing General Electric (GE) as the world's most highly valued listed company after Exxon Mobil (XOM).
• PetroChina's shares, which ended at HK$18.78, have soared some 60 percent since the start of September as Chinese media reports of big new oil and gas finds fuelled voracious demand for the stock.
• "We believe after the company's A-share listing is launched next month PetroChina is likely to announce a number of substantial oil and gas discoveries," said Citigroup energy analyst Graham Cunningham in a research report. "We thus expect strong short-term (2-3 months) share price performance."
• The firm added to the optimism on Monday with third-quarter production data showing it had pumped more oil and gas while managing to pass price rises on to its customers.
  
• Larry Grace from Kim Eng Securities said that although the report was positive, it contained few surprises, but enthusiastic investors were likely to charge in to the stock regardless. "I look at the fundamentals but mainland (Chinese) investors do not. They just want to buy it," he said. (classic quote!)
• PetroChina's third-quarter report showed oil and gas output grew 5.6 percent, up from a 3.7 percent year-on-year rise in the first half of 2007 and bringing PetroChina towards its full-year target of 5.3 percent, which it said it was on track to meet.
• But Citigroup's Cunningham said PetroChina was now 10-15 percent overvalued relative to the oil majors, based on a price-to-earnings comparison

Takeaway: Amazing performance. At this pace PetroChina should pass Exxon as the largest company in the world by.... next week.

2) I keep writing about the massive effect buybacks are having on the market. I found this SeekingAlpha article which had a startling fact of the total market capitalization of the S&P 500 (I had been looking for this data) - I had written that buybacks were on pace to take out $1.1 trillion of stock as of Dec 31, 2007 (using the last 6 quarters at that time). The article states: "the entire market capitalization of the S&P 500 is just $14 trillion."

So 8% of the entire S&P 500 stock will have been retired by end of 2007 when we look at mis 2006-end of 2007 data. Astounding. I have written that the equivalent of 10 mid sized company (between size 200-250) of the S&P 500 is disappearing each quarter and this data supports this assertion.

The article also makes a few other points in terms of who is really benefiting from this:

• Buybacks are supposed to make us feel all warm and fluffy about companies. "See?" we are supposed to think. "Management believes in the stock."
• Instead, I think the driving force behind corporate buybacks has changed... and the impact of buybacks on the market has changed as well.
• In the good old days, companies did buybacks mostly in extraordinary circumstances, like when the stock fell excessively in reaction to relatively minor news. Now, however, buybacks are almost a line item in corporate budgets. X dollars for salaries, Y dollars for office supplies and Z dollars for corporate buybacks.
• And that’s bad news for shareholders. Why? For one, buybacks are used to cover up costly options schemes that would otherwise dilute the company’s stock. It’s a neat trick to report profits and then use those profits to cover the real expense of an options program.
• But just as importantly, as I've written before, buybacks favor management over current shareholders. Corporations have two choices on how to return money to shareholders. They can pay it out as dividends to current shareholders, or they can buy back stock. The problem with buybacks is that they raise the value of both existing shares and shares that have yet to be issued, aka options. Buying back stock today increases the value of the options that executives will cash in tomorrow. And faced with the option of choosing buybacks vs. dividends, not surprisingly, most corporate officers are choosing buybacks.
• Over the same time frame, S&P 500 companies have paid out just $594 billion in dividends - less than half of the stock buyback budget. In fact, the S&P says that the situation is getting worse: the number of companies that raised their dividends in Q3 fell sharply from Q2.

Good points all. While I'd argue it is still a net positive for current shareholders - I do agree this 'stealth' process of replacing purchased shares with new options for upper management is common and a bit disgraceful but that's the greed of corporate America and it's not changing anytime soon. Even with the favorable Bush tax treatment on dividends companies are moving to buybacks instead of cash payouts to their investors. The article has good reasoning why. More important to me, since I can't do a damn thing about such practices, is take advantage of the situation and recognize what is going on. And what is going on is a literal shrinking of the equity market on a weekly basis of epic proportion. And I don't see it letting up anytime soon as the companies doing the retiring are still the multinationals enjoying massive gains in this time of record crude prices and global growth.

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