A Chinese Blue Chip Poised for Growth

01/28/2009 12:00 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of The Silk Road Investor, says Asian stocks are selling at big discounts, and he thinks a big Chinese oil company is particularly attractive. 

When it comes to Asia, the market is starting 2009 at better valuations than 2008—and with positive momentum.

Asian markets trade at 1.41x [book value]. And even after the recent bounce, a big number of Asian stocks still trade below their 200-day moving averages.

I’m adding Chinese oil company CNOOC (NYSE: CEO) to the Silk Portfolio this week. This is a quality growth company trading at attractive valuations—a price-to-earnings ratio of seven times and a price-to-book of [less than] 1.5x. And it offers a 5.9% dividend yield.

CNOOC recently presented its strategy for 2009. Strong volume growth and continuous exploration are its two main pillars.

Weak oil prices haven't affected CNOOC’s plans much, and that's a very good sign. The company is expected to have capital expenditures of $6.7 billion in 2009 with $4.4 billion earmarked for development.

Development funding is also expected to increase in 2010, making CNOOC one of the best long-term energy plays in Asia.

The company is the third largest oil and gas company in China, accounting for 8% of the nation's aggregate reserves.

But its real value is it has exclusive rights for offshore exploration, development, and production of crude oil and natural gas in Chinese waters. That's a big deal.

CNOOC is targeting 15% to 18% production growth over 2008. From that, offshore China exploration will contribute around 10%, while projects in Nigeria and Indonesia are expected to cover the rest. The company plans on drilling at least 80 exploration wells in 2009.

What’s more, the company is expected to grow production by 8% to 10% during the next five years, especially as the company’s deep water exploration projects in the South China Sea get under way.

A strong balance sheet, a relatively low cost structure, and its discovery potential are more positives for the stock. It also has production-sharing contracts with foreign investors offshore China.

CNOOC recently announced that it believes oil and gas reserves in the region could be as high as 22 billion barrels of oil equivalent (BOE) and that production could peak at a billion BOE a day.

I expect oil prices will rebound later in the year as demand and supply adjust to the new realities and the global economy finds better footing.

And current low oil prices allow the company to look into acquisitions given its solid balance sheet. No doubt the stock will be affected by the market’s negative sentiment, but this should prove to be a short-term drawback. CNOOC remains a buy.

Buy CNOOC at current prices. (It closed above $87 Tuesday—Editor.)

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