China Petroleum & Chemical Corp (ADR) (SNP), PetroChina Company Limited (ADR) (PTR): Significant Risks in Passive Chinese ETFs

The third position, with a weighting of 4.5%, of the China Petroleum & Chemical Corp (ADR) (NYSE:SNP) is PetroChina Company Limited (ADR) (NYSE:PTR). The one-year return of this stock is flat (see the price chart below). This company does exploration, development, and production of oil and natural gas. Fortunately, PetroChina Company Limited (ADR) (NYSE:PTR) does release an English version of a quarterly statement. The first quarter of 2013 reported earnings of 0.20 renminbi per share (diluted), versus 0.21 renminbi per share (diluted) for the same period of 2012. Management states that the weakened global economy and geopolitical turmoil have been contributing factors to the 8% drop in per share earnings. I find little benefit to allocating capital to an offshore oil company such as PetroChina Company Limited (ADR) (NYSE:PTR) when there are numerous domestic choices available.

The fourth ADS held in the China Petroleum & Chemical Corp (ADR) (NYSE:SNP), with a holding of 4.2%, is CNOOC Limited (ADR) (NYSE:CEO). This is another oil and gas company and has delivered a one-year return of 0.45% (see the price chart below). The first quarter 2013 release is well adapted to US standards. The opening comments state that oil and gas revenues when compared to the same period of last year are up 13.03%. Five new discoveries have been made and six successful appraisals of wells have been achieved. All the production is taking place off the coast of China, with one project in Algeria. These press statements are the most open I have seen in this group. Yet, when I look at the price performance, I still see the same currency concerns. I remain cautious about this as a stand-alone investment at this time.

In my opinion, the China Petroleum & Chemical Corp (ADR) (NYSE:SNP) is an exchange-traded fund that contains a lot of flaws not properly addressed due to the passive management style. I believe in the long-term prospects of investing in China’s largest and profitable companies. I feel that the best way to do this is by hiring an active manager that has office space in one of the major cities of China, such as Hong Kong or Beijing. The ability of a local and active money manager that is well acclimated to the local markets is a value added proposition that is worth the extra costs. Anybody that makes an investment in such a place with no close proximity to monitoring the portfolio adds displacement risk to the list already mentioned. A lot can happen that goes unnoticed.

The article Significant Risks in Passive Chinese ETFs originally appeared on Fool.com and is written by Jeff Stouffer.

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