2004: Why did Buffett invest in PetroChina?

AUDIENCE MEMBER: Good afternoon, my name is Andy Peake, and I’m from Weston, Connecticut.

As a keen China watcher, I was very interested in your PetroChina investment.

Could you please tell us more about your thought process on investing in a complicated, opaque country like China, and PetroChina?

WARREN BUFFETT: Yeah, PetroChina itself is not a complicated or opaque company. You know, the country, you know, has obviously, different characteristics in many respects than the United States.

But the company is very similar to big oil companies in the world. I — and I — PetroChina may have been the fourth largest — fourth most profitable — oil company in the world last year. I may be wrong on that.

But they produce 80 or 85 percent as much crude daily as Exxon does, as I remember. And it’s a big, big company. And it’s not complicated.

I mean, you know, obviously, a company with half a million employees, and all of that. But a big integrated oil company, it’s fairly easy to get your mind around the economic characteristics that will exist in the business.

And in terms of being opaque, actually their annual report may well tell you more about that business, you know, than you will find from reading the reports of other oil giants.

And they do one thing that I particularly like, which other oil companies don’t, at least to my knowledge, is that they tell you they will pay out X percent, I think it’s 45 percent of their earnings, absent some change in policy.

But I like the idea of knowing in a big enterprise like that that 45 percent of what they earn is going to come to Berkshire, and the remainder will be plowed back.

It was bought not because it was in China, but it was bought simply because it was very, very cheap in relation to earnings, in relation to reserves, in relation to daily oil production, and relation to refining capacity.

Whatever metric you wanted to use, it was far cheaper than Exxon, or BP, or Shell, or companies like that.

Now, you can say it should be cheaper, because you don’t what’ll happen with it 90 percent owned by the government in China, and that’s obviously a factor that what — you stick in valuation. But I did not think that was a factor that accounted for the huge differential in the price at which it could be bought.

And, you know, so far it looks OK on that basis.

We weren’t — we aren’t there because it’s China, but we’re not avoiding it because it’s China, either. We just — we stick in a fairly appropriate number.

But if you read the annual report of PetroChina, I think that there’s no — you will have as good an understanding of the company as you would if you read the annual report of any of the other big oil majors.

And then you would factor in your own thinking about whether there could be some huge disruption in Chinese-American relationships or something of the sort, where you would lose for reasons other than what happened in terms of world oil prices, and that sort of thing. But we’re happy with it.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

If a thing is cheap enough, obviously you can afford a little more country risk, or regulatory risk, or whatever. This is not complicated.

WARREN BUFFETT: Yeah, you can — Yukos, as you know, is a very big Russian oil company. And in evaluating Russia versus China, in terms of country risk, you know, you can make your own judgments.

But in our view, something like PetroChina was both cheaper and had less risk. But other people might see that differently.

Related: Eagle Point Capital’s case study on Buffett’s investment in PetroChina.