The Borat Trade: Investing in Kazakhstan

Kazakhstan has been in hitting the news lately… and this time it’s not just because of Borat. Last week’s Barron’s featured an article on emerging markets, and cited this rising star in central Asia as a prospective addition to Progressive Asset Management’s Advance Frontier Markets Fund.

Much like neighboring China, this country also sustains a 9%+ GDP growth. But unlike resource-hungry China, Kazakhstan is a supplier of raw materials. Its vast reserves of oil, natural gas, and uranium near the Caspian Sea are the reason for a flood of foreign investment.

This article is about the Western stocks pioneering this emerging land. Investing in these stocks as a basket is what I like to call the “Borat” trade.

ChevronOil

Early in the next decade, Kazakhstan is expected to become the world’s fifth largest exporter of oil. It currently ships 1.3 million barrels of oil daily, and that number is expected to increase tenfold over the next ten years.

Chevron (CVX) is the early bird to this bull market. As the first Western oil company to arrive in Kazakhstan, Chevron has become its largest private oil producer. Approximately 20% of their net proven oil and natural gas reserves are in Kazakhstan.

According to their 2006 10-K, about 10% of their daily oil production came through their TengizChevrOil subsidiary in Kazakhstan. The subsidiary is a 50% owned joint venture ExxonMobile and Kazakhstan’s state owned oil company. Currently, their oil fields are under expansion plans, expected to increase capacity between 53% and 83% by 2008. The Tengiz oil field is one of the world’s largest with an estimated 6 to 9 billion barrels of recoverable oil.

In addition, Chevron has vertically integrated itself in the oil supply chain, managing pipelines along the Caspian Sea and selling oil-based products within the country’s borders.

Transmeridian

For a more speculative play, try Transmeridian (TMY), an oil exploration company whose principal asset is the South Alibek Field of Kazakhstan. This oil field has estimated proven reserves of 72.9 million barrels of oil equivalent and 108.2 million barrels of probable resources.

Just last April, management has announced that it is considering selling out the company. Analysts anticipate that if such a transaction were to take place, this currently $117 million market cap company could sell for as much as $600 million. The possibilities and low valuation of this company even landed it a spot on Jim Cramer’s top ten list of speculative stocks.

Parker Drilling

A third American company to benefit from Kazakhstan’s increasing oil production is Parker Drilling (PKD). This is a small international driller currently operating in 13 different countries. Some of its primary operating grounds include Libya, Mexico, and Kazakhstan. Just last April they received new contracts commissioning an additional two rigs to their current Kazakhstan jobs, and the contracts on their existing two rigs have been extended by three years.

SXR Uranium One

Finally, my number one stock for profiting from Kazakhstan is not oil, but a uranium play: Canada-based SXR Uranium One (SXRZF.PK). As the uranium bull market rages, driven by a wave of new international nuclear reactors coming online, this company has been building itself into a uranium mining powerhouse.

In April, SXR closed an acquisition for Kazakhstan-based UrAsia Energy, giving them 70% ownership of Kazakhstan’s Akdala mine. In addition, they will also be exploring and developing two new sites: the South Inkai and Kharasan projects.

According to their latest quarterly report, SXR now has 48.7 million pounds of uranium content in proven and probable reserves. While this is small compared to the 513 million pounds in uranium giant Cameco’s reserves, SXR is building itself into a notable contender. Last month they announced new plans to acquire Energy Metals Corp (EMU). If the deal is successful, SXR will have the second largest portfolio of uranium reserves in the world.

Better yet for SXR, production at Cameco’s Cigar Lake mine is impaired due to a flooding accident. Without Cameco able to access to one of their biggest assets, SXR will enjoy high uranium prices from tight supply and has a chance to fill Cameco’s lost market share.

Final Word

Kazakhstan is one emerging market that we will be likely to hear more about in upcoming years. Its recent development is a boon for mining and mineral exploration companies. A few of these stocks are likely to produce long run returns that are, as Borat would say, “very niiiiice!”

Full Disclosure: At the time of this writing, Winston holds long positions in CVX and CCJ.

Comments

[DanielJacome]

nice article, great title -- congrats!