Straying Off the Beaten Track

08/11/2009 11:53 am EST


Yiannis Mostrous

Editor, The Capitalist Times

China's oil giant ventures off the coast of Angola, while Philippine Telephone dials up its sales pitch, writes Yiannis G. Mostrous in Silk Road Investor.

The third largest oil and gas company in China, CNOOC Limited (NYSE: CEO), already accounts for 8% of the nation's aggregate reserves and owns exclusive rights to develop oil and gas fields off the Chinese coast, as well as the ability to enter production sharing contracts with foreign operators.

The energy behemoth currently produces 9% of China's annual oil and gas and expects output to grow 6% to 10% over the next five years—a realistic objective that the firm could achieve even without deep water exploration.

Among the three main Chinese oil companies, CNOOC is the only direct beneficiary of higher oil prices, thanks to its pure exposure to exploration and production. That's both a blessing and a curse.

Some analysts roundly criticized the company's plans to increase capital expenditures by 20% this year, citing low oil prices. For most companies, that would be a legitimate quibble, but CNOOC boasts roughly $3.5 billion in cash; that ballast allows it the luxury to purchase reserves and make other moves that lay the foundation for long-term growth. That said, capital expenditures will weigh on earnings this year unless oil trades consistently above $70 a barrel.

On the strategic side, CNOOC and Sinopec Group, the parent company of Sinopec (Hong Kong: 386), acquired a working interest of 20% in Block 32 off the coast of Angola for $1.3 billion—a much lower price than many analysts had anticipated.

[The concession has an area] of 5,090 square kilometers and is an oil-rich deep water exploration block with 12 oil discoveries. Preliminary studies indicate [it] should have recoverable high-quality light oils equivalent to about 1.5 billion barrels.

Although CNOOC has only a 10% working interest in Block 32 and production won't commence until 2014, the move represents another step to enrich the company's deep water portfolio. The deal also should open the doors to future ventures. Buy CNOOC Limited up to $125. [Shares closed at $139.30 in New York Monday—Editor.]

A Ringing Endorsement Philippine Long Distance Telephone (NYSE: PHI) is the dominant provider of domestic and international long-distance and cellular services in the Philippines.

Recently its wireless subsidiary, Smart, launched an aggressive unlimited call promotion to compete with similar offers from other providers. The decline in price for voice services could lead to higher voice usage and bolster revenues. Note that short messaging service (SMS) is far more popular in the Philippines; subscribers send about 600 SMS texts per month but use just ten minutes of voice per month.

The launch of this new promotion is Smart's first significant attempt to gain market share in the under-penetrated voice market. With a penetration rate of 70%, cellular operators are increasingly targeting the lower-income segment while [pitching new services] such as wireless broadband to grow revenues.

Though it operates in a risky market, Philippine Long Distance one remains one of our most conservative holdings and continues its steady growth. Buy PHI up to $65. [Shares closed at $52.41 in New York Monday—Editor.]

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