China’s Oil Companies: The New Kids on the Oil Block

 |  Includes: CEO, PTR, SNP
by: Investment U

By Tony D’Altorio

China’s quest for energy has become a hot topic in recent years. Its search for energy resources has changed the global energy landscape… perhaps forever.

This year in particular, its national oil companies have gone into overdrive in expanding.

According to energy consultancy Wood Mackenzie, Chinese companies have spent $24.6 billion on overseas oil and gas acquisitions so far this year, with $11.4 billion into Brazil’s offshore oil fields alone. Altogether, they make up a fifth of the larger industry’s deal making in 2010.

Yet less than two years ago, China’s national oil companies accounted for a mere 4% of mergers and acquisitions in the sector. Clearly, much has changed since then.

Luke Parker, manager of Wood Mackenzie’s merger & acquisition service, notes that the oil price spike in 2007-08 was “a real shock to China.” Since then, its oil companies have had a much more “aggressive and opportunistic view of the long-term price of oil.”

That has led to impressive gains… and opens up a slick opportunity for savvy investors…

Chinese Oil Companies Willing to Spend

With their new, long-term outlook, Chinese oil companies are more willing to spend on exploration and development. And they don’t seem to mind paying top dollar for it.

They have also become more sophisticated in the way they operate and approach deals. They don’t shy away from direct competition with western competitors for hot purchases.

They proved that when bidding on offshore western Africa and Brazil’s pre-salt reserves. Chinese companies like Petrochina ADR (NYSE:PTR), Sinopec ADR (NYSE:SNP), CNOOC ADR (NYSE:CEO) and Sinochem have all proved to be tough negotiators.

Sinopec takes the lead so far this year, spending $13.1 billion on purchases. That includes $7.1 billion for a stake in the Brazilian fields of Repsol ADR (NYSE: REP), and a portion of the giant Canadian oil sands project, Syncrude.

Next comes CNOOC at $5.8 billion. It spent over $1 billion of that on a deal with Chesapeake Energy (NYSE:CHK) in its Texas shale oil and gas project… underscoring China’s appetite for even unconventional energy resources.

Then there’s Sinochem, which had no record of oil exploration or production until 2003. But it has grown steadily since through small acquisitions since.

Most notably, it edged out two other Chinese bidders in May, to pay $3 billion to win a 40% stake in the Peregrino field, owned by Statoil ADR (NYSE:STO).

As for Petrochina – the subsidiary of China’s largest oil and gas producer, CNPC – it could make a major deal soon as well. According to rumors, it even had its eye on BP ADR (NYSE:BP) during the oil spill debacle.

China’s Energy Realities

All that deal making comes as no surprise to even casual China observers.

After all, the country’s energy demand doubled since 2000. China overtook the U.S. this year as the world’s largest energy user, according to the International Energy Agency (IEA).

China has also become the world’s second largest oil consumer. Between 1999 and 2009, its usage increased by 93%, while total global consumption rose only 11%.

The IEA says it will remain the world’s engine of oil demand. China will account for more than 40% of the world’s estimated growth in oil demand this year.

Since it imports about 55% of its oil needs, don’t expect that M&A activity to end. China will continue needing more as it attempts to meet its soaring energy demand.

Fortunately for China though, it has more than one way of doing that. Cooperating with western oil companies works just as well as buying them up.

One particular business seems to recognize that the most. Often called the most “western” of oil majors because of its long history of working with foreign competitors, CNOOC knows how to play nice for stellar results.

Founded with a mandate to form joint ventures with foreign oil companies, it taps into its partners’ expertise to help it extract China’s underwater oil and gas reserves. Through the years, CNOOC has successfully upheld this strategy.

Additionally, it looks set to grow production by 28% this year. And let’s not forget that its cash hoard of $8 billion is denominated in yuan. As the Chinese currency appreciates, CNOOC will gain even more in buying power.

Overall, Chinese oil majors continue to pick off plum oil assets around the globe, looking better every time they do. But with a yield of over 2% and trading at about 9 times 2011 earnings estimates, CNOOC continues to top the list.

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