Two Good Plays on China’s Energy Boom

08/06/2007 12:00 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor of China Stock Digest, says two leading Chinese energy companies should continue to benefit from high oil prices and China’s continuing energy boom.

The Chinese government has little choice but to raise fuel prices despite its reservations about boosting inflation, [especially] if the international price of crude remains above $70 a barrel for a sustained period. We see little likelihood that oil prices will plunge in the foreseeable future. In the absence of a public outcry we’re looking forward to a moderate rise in fuel prices and increased profitability among our oil stocks.

China National Offshore Oil Company, Cnooc (NYSE: CEO), continues to rise despite some pressure on prices caused by volatility. For the month, share prices are up only 3%, but a more accurate view of the company’s performance is represented by its three-month gain of 30%.

Cnooc is continuing its relentless expansion drive, announcing that it expects to produce as much as 50 million barrels of oil equivalent annually by 2010. Current output is 40 million tons of oil and gas. The company will depend more on imported oil and less on domestic product as it expands, but it may be insulated from international price shocks because it is a primary investor in 45 overseas oil and gas blocks in ten countries.

Adding to the positive outlook are credit ratings upgrades from Moody’s and Standard and Poor’s. The company is still trading at an attractive valuation with a P/E of 14x. We believe the company remains a good buy due to its ongoing, international growth drive. The company’s trailing twelve-month dividend yield is 2.9%. (The ADSs closed at around $113.50 Friday—Editor.)

PetroChina (NYSE: PTR), Asia’s most profitable company, rose approximately one percent for the month despite Wall Street’s plunge. The company’s fundamentals still look very strong, even though shares did fall from their one-month high due to the side effects of the New York nightmare.

PetroChina’s natural gas output rose by 16.5% in the second quarter compared to the same period last year. Crude output is essentially flat because of falling production in China’s aging Daqing Oilfield. New production is expected to come on stream as a crude oil pipeline from northwest China goes into operation this quarter. The company has also confirmed its plans to expand its cooperation with Canadian partners on oil sands projects.

The company is expected to raise $6 billion before November by selling four billion shares on the Shanghai A-share market. PetroChina will use the Chinese currency raised in the Shanghai listing to develop its giant discovery in the South China Sea called the Jidong field. The Jidong discovery is considered the biggest in the region in the past 50 years. We are still waiting for PetroChina to make a formal announcement about its Longgang gas discovery in Sichuan province. The field has reserves of at least 500 billion cubic meters.

PetroChina remains reasonably priced with a forward P/E of 11.6x and a trailing-12-month dividend yield of 3.08%. (The ADSs closed just above $138 Friday—Editor.)

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