Chinese Oil Companies: Who They Are and How to Play

Chinese Oil Companies: Who They Are and How to Play

by Chris Matthai, Investment U Research

An Investment U White Paper Report

Let’s face it: it’s impossible to deny China’s impressive growth over the last two decades. The bulls and the bears can argue all day – each with their valid points – about where China is ultimately headed (and how quickly), but one point is indisputable…

Few people thought China would become this significant this fast.

The country has become the world’s second-largest economy, the world’s largest energy consumer and the world’s second-largest oil consumer… all in the last few years.

Last year, PriceWaterhouseCoopers speculated that “China could be the largest economy in the world as early as 2020…” And really, it’s not the first such reputable company to say so. Nor will it be the last.

Of course just because people are speculating about, hoping for, or downright dreading the possibility, that doesn’t change things. Nobody really knows one way or the other when China will peak, no matter how many people like to claim otherwise. In fact, it’s safe to say that long-term estimates are almost never right, mainly because nobody can predict the future.

With all of that said however, there is one thing you can pretty much count on… the Chinese economy is going to keep growing. It’s simply a question of how rapidly.

Regardless of whether China really does take the number one spot in the global economy or not, it’s going to be consuming a great deal of energy in the years and decades ahead. And the government is doing everything it can to make certain the country has the energy resources it needs.

That means that even if investors don’t feel comfortable putting their money directly into China, they should still be well aware of China’s energy strategy. Considering previous actions by China’s state-controlled oil giants, it’s more important than ever for investors to take a close look at how China’s oil companies do business.

Because when it comes to energy, China isn’t particular about where it gets it from. It’s just hell-bent on getting what it needs. And in the process, it’s shaking up the energy sector like no one has seen before.

Chinese Oil Companies: Out to Get What They Need… With or Without Your Cooperation

China has three major energy companies that already dominate the national industry and have been aggressively expanding outward for the last several years.

Those companies are:

  • China National Petroleum Corp., PetroChina or CNPC
  • China Petroleum & Chemical Corp., or Sinopec
  • China National Offshore Oil Corp., or CNOOC

All three are ranked in the top 10 largest refining companies in Asia, if not the world. And considering the continent’s size, growth projections and energy needs… those companies seem destined to stay near the top.

Sinopec, for one, is obviously intent on moving up in the world. By last year, it had already spent over $32 billion in mergers and acquisitions. While much of that was in Syria, Argentina and Russia, it also conducted a $7.24-billion takeover of a Swiss exploration company, Addax Petroleum Corp.

And the same aggressive tactics go for China National Petroleum Corporation…

In February of last year, it was reported that CNPC made an offer for a piece of Woodside Petroleum Ltd.’s Browse gas project, which is set in Western Australia. And this March, it looked like that plan – to acquire $3.7 billion worth of the field – is set to go forward. As a spokesman explained, “PetroChina is willing to expand our presence in Australia when a good opportunity arises.” And this is a very good opportunity.

The company also finalized its purchase of the MacKay River oil sands project in Canada with Athabasca Oil Sands Corp. last year, giving CNPC full ownership. Then it did a joint venture with Royal Dutch Shell plc. The partnership involves the construction of a liquid natural gas plant in Canada for developing and producing shale gas. It’s also in talks with Valero Energy to buy one of its oil refineries.

And not to be outdone, China National Offshore Corporation was just as busy this year. It finalized a 100% acquisition of OPTI Canada, giving it a foothold in four Canadian oil sands projects.

Then it went on to sign a production-sharing contract with ROC Oil Company, a leading oil and gas company based in Australia. Together, they’ll work over a 355 square kilometer off of China’s Bohai Sea, though CNOC has the majority option with up to 51% working interest in the area.

Chinese Ownership… Coming to an Oil Company Near You

CNOOC said it expects to be one of the biggest oil companies in the world by 2030. The firm is currently the thirty-fourth-largest oil company by reserves, but based on its upcoming joint-venture deep-sea drilling projects in the South China Sea, CNOOC is obviously looking to move up in the rankings.

Then there’s Sinopec Group, which just launched its first ever shale gas project last year. It expects to churn out 6.5 billion cubic meters of shale gas for domestic use by 2015.

On the other hand, Western oil and gas giants have been struggling. And some of them don’t seem to be winning those struggles since the Great Recession struck five years ago.

Finding oil is becoming more and more difficult these days. It’s still very possibly to discover giant new fields… It’s just that those fields are in less and less easily accessible areas and therefore more and more expensive to utilize.

But Chinese oil companies seem to have the upper hand over its Western rivals. And for an obvious reason.

When you have the Chinese government as a partner, financing your operations and objectives becomes a lot easier.

With the deep pockets of the Chinese Central Bank in their corner, they can take an aggressive approach to mergers and acquisitions. And eager to feed its growing energy appetite, China’s worldwide buying binge for oil and other energy assets is now spreading to North America.

As of this report’s most recent update, the last figures available indicated that China consumes about 10 million barrels of oil a day – roughly half of what the United States uses. Like the United States, China imports about half the oil it needs.

But unlike the United States, where oil demand is flat or declining, demand in China is expected to jump 50% by 2020.

Bottom line for the Chinese: they have to get as much oil as they can from wherever they can.

China’s Foreign M&A Spree… How Do You Profit as Investors?

According to MarketWatch, “In 2011, the total mergers and acquisition value of China’s three biggest oil companies – CNPC [a.k.a. PetroChina], China Petrochemical Corp. or Sinopec, and China National Offshore Oil Corp. or CNOOC – reached about $20 billion.” Yet just a few years ago, they accounted for a mere fraction of that number. So there’s significant growth taking place.

Unfortunately, the Chinese oil companies themselves don’t make the best investment choice. The main reason is that companies like Sinopec operate for the sole purpose of fulfilling the needs of the Chinese government. Therefore they’re notorious for spending more than they need to for exploration, development, and mergers and acquisitions.

Naturally, this means that the companies’ shares don’t perform as well as we would always like them to. So we’re not currently recommending investing directly in them.

Instead, we think the money will be made by:

  1. Being bullish on oil and looking for undervalued opportunities
  2. Investing in those companies that make likely takeover candidates for the Chinese oil companies and others

For investors interested to take advantage of China’s increasing energy presence abroad, one of the best ways you can play this trend is through the SPDR Oil & Gas Exploration & Production ETF (NYSE: XOP). The fund uses a replication strategy that tracks the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.

In addition, we’re tracking specific companies likely to be attractive acquisition candidates for Chinese oil companies and other “big oil” players. We’ll bring these to your attention in future Investment U columns, but for now let’s play the big picture.

Good Investing,

Chris Matthai

Investment U Research Team

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