However, the Sudan Divestment Task Force has a PDF here that argues differently. The two corporations share management, and have frequently transferred assets. They may be incorporated separately, but the Task Force makes the case that we should see them as the same company.
Petrochina's 2006 SEC Form 20-F states:
“CNPC owns approximately 88.21% of our share capital. This ownership percentage enables CNPC to
elect our entire board of directors without the concurrence of any of our other shareholders. Accordingly,
CNPC is in a position to... control our policies, management and affairs...”
The Task Force reports that:
...CNPC has
appointed a PetroChina Board that is nearly indistinguishable from CNPC. The
PetroChina Board is comprised of 13 Directors (of which one Directorship position is
currently unfilled), only three of which are independent (and one of the three independent
Directors is tied to the Chinese government).108 Eight out of the nine current non-
independent Directors of the Board have a current or former connection to CNPC. The
Board’s Chairman is the immediate past President of CNPC and the Board’s Vice-
Chairman is the current President of CNPC. Furthermore, CNPC’s Chief Financial Officer
and four out of five CNPC Vice Presidents also serve as Directors on PetroChina’s Board.
The only CNPC Vice President that doesn’t serve on PetroChina’s Board is, instead, a
Vice President at PetroChina.109 These elaborate but confusing relationships are visually
laid out in the Appendix immediately following this report.
In addition, many of the executives in both companies have close ties to the Chinese government. Many Westerners view such ties negatively. The practice is more commmon in Asian countries. The Task Force isn't trying to debate good corporate governance, though. It's trying to tell us that China has looked the other way, and that if we divest from CNPC/Petrochina, we create pressure on the Chinese government.
Moving on, the Task Force highlights the fluidity of asset transfers between the two companies.
The history of the CNPC-PetroChina relationship begins in 1999 with CNPC’s failed
attempt at an initial public offering (IPO) on the New York Stock Exchange (NYSE). At the
time, “Western investor concerns about [CNPC’s] operations in Sudan forced the
company to scrap its initial IPO plans and instead carve out and offer a subsidiary,
PetroChina, to the public which CNPC pledged would not be involved in Sudan
activities.” Today, CNPC owns 88.21% of PetroChina’s shares with the rest available to
outside investors. At the time of its IPO application, CNPC’s promise to maintain an
absolute firewall between PetroChina and CNPC’s Sudan assets was met with skepticism
by many US investors, who pointed out that any revenue generated by PetroChina for
CNPC (for example, in the form of dividend payments) was inherently fungible and could
therefore be used, even if indirectly, to fund CNPC’s Sudan operations. One noted analyst
[Editor: a political risk analyst] claimed that the only way the firewall could work “is for CNPC to get out of Sudan” and
another referred to the firewall as “a smoke screen.” The fears of the skeptics were soon
confirmed. When “PetroChina was offered to the public, it incurred $15 billion in debt from
CNPC, some of which was acquired in connection with CNPC’s Sudan operations.” In
addition, analysts at the time estimated “that some US$270-US$300 million of
PetroChina’s [IPO], about ten per cent of the total, went directly to CNPC – and this was
new money that could be included in CNPC’s new investment in the Eastern Upper Nile
[the area where Petrodar operates].”
Since the public offering, there have been dozens more asset transfers between
PetroChina and CNPC, all executed under a non-competition agreement jointly signed by
the companies at the time of PetroChina’s IPO.
Additionally, Petrochina has sold assets to and bought assets from CNPC. Financial information for the assets traded was not publically available. Petrochina places much of its available cash on hand with a finance company owned by CNPC, which may loan it out to other CNPC subsidiaries. Petrochina has a number of unsecured, below market rate loans from China Petroleum Finance Company, which I just referred to. These can be construed as cross subsidies. The Task Force reports that Petrochina did take on debt from CNPC when it was IPOed, but as I understand it, this is a fairly common practice when Western companies make spin-offs.
So, basically, it would not be far wrong to think of Petrochina and CNPC as one company, or at least two companies with substantial overlap. If these had been US companies, Petrochina would probably have much greater distance from CNPC, and then Buffett's argument would have much greater weight. However, these aren't US companies (and anyway, if they were, I still wouldn't invest in Petrochina).
As I understand it, Fidelity has divested 91% of its shares in Petrochina, including all its US ADR shares (these trade on US stock exchanges). They have yet to finish divesting their Petrochina shares held on foreign exchanges.
2 comments:
Independent researcher KLD confirmed the conclusions of the Sudan Divestment Task Force in their May 4th report. They said that “investors should treat CNPC and PetroChina as if they were a single entity.”
Continued assertions that PetroChina is unrelated and has little to do with CNPC in the face of these facts are either misinformed or disingenuous.
Bill, thank you for that. For readers who don't know, KLD is a firm that does social screening research for SRI firms. one of the founders is Amy Domini, founder of one of the more well-established SRI firms (albeit her shop's funds are a little pricey). she also sits on the Episcopal Church's pension fund. she's no longer involved with KLD, as I understand it.
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