‘World’s Biggest Stock Collapse’ is a Big Opportunity

The headline was too arousing to let pass:
“The Biggest Stock Collapse in World History Has No End in Sight”
The headline comes courtesy of Bloomberg Markets. The company that elicited the headline and the accompanying article was PetroChina Co. (NYSE: PTR), the state-controlled Chinese energy company.
The biggest stock collapse in world history could be generated only by a big company. PetroChina unarguably fills the bill. It generated $283 billion in revenue over the trailing 12 months. Its equity market cap exceeds $227 billion.
As for the collapse, Bloomberg’s muckrakers tell us that PetroChina shares peaked on their first day of trading on the Shanghai Stock Exchange in 2007. Not so coincidentally, they also peaked on the New York Stock Exchange when the PetroChina stock price (technically, the American depositary receipt price) breached $250.
A year later, during the great bear market that followed the banking collapse, PetroChina shares collapsed to trade in the low $60s. PetroChina stock had lost 75% of its value.
The biggest stock collapse?
I beg to differ. I know of more pronounced collapses that occurred during the great tech collapse in 2000. (JDS Uniphase, a former Wall Street darling, saw its share price implode to $2 from $1,200 in little more than a year.)
But let’s be fair: I focus on the relative, Bloomberg focuses on the absolute.
PetroChina has seen $800 billion of equity market value disappear since the heady days of 2007. In absolute dollars, that is the largest absolute equity-value loss in history.
But to ascend to the highest point and then to extrapolate from there is disingenuous. PetroChina stock had a huge run in 2007. The company gained nearly $600 billion in equity-market value. PetroChina shares were grossly overvalued when they peaked on the NYSE in 2007.
I learned long ago that popular media outlets can serve as reliable contrarian indicators. Bloomberg is a popular media outlet.
For most of PetroChina’s publicly traded history, Chinese government has been growth focused, efficiency be damned. PetroChina’s strategy has been to aggressively acquire oil-and-gas assets around the world.
It’s mission accomplished: PetroChina holds access to producing assets that cover 594,000 square miles — a region larger than Texas, New Mexico, Arizona, and Utah combined.
But times and demands change. The Chinese government has become far less content to see PetroChina grow for growth’s sake. Improving efficiency to drive profits has been pushed front and center.
The focus on efficiency has produced actual results. Gross margins improved to 40.6% in 2016 from 35.1% in 2013.

PetroChina Stock Could Move Higher

More efficiency and higher energy prices are a good combination if you’re investing in an energy company.
PetroChina’s revenue rose 17% year over year for the third quarter. Earnings for the quarter rose much more – a 290% rise year over year. PetroChina reaped the benefits of a rebound in crude prices and its ongoing efforts to run the operations like a real business.
Other macro winds could lift PetroChina stock higher.
Capital expenditures for global oil production grew at an average 11% average annual between 2010 and 2014 to hit an all-time high of $520 billion before the oil-price crash in 2014. Two years on, capital expenditures had declined by more than 60% to an estimated $200 billion in 2016.
Oil production is headed toward a deficit. Higher oil prices are needed to spur production. The macro outlook for energy demand supports the outlook for the integrated energy giants.
Thanks to rising energy prices and improving efficiency, PetroChina should earn $1.95 per share this year. If oil prices continue to trend higher, a huge jump in EPS is on tap for next year. EPS between $3 and $4 is within the realm of possibilities.
Contrary to Bloomberg, I see an end to the biggest stock collapse in the world. I also see the beginning of an investment opportunity that offers the potential for share-price appreciation over the next 12 months.

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