China North East Petroleum Holdings: Too Small to Buy or Too Impressive to Ignore?

China North East Petroleum Holdings' (CNEH.OB) performance challenges the use of many recent investing mantras such as: don't chase a momentum spike, Chinese stocks are overheated, small stocks can't weather an economic or market downturn, etc. It is true that CNEH.OB has gained over triple in less than a week with a yearly high of $1.7. The 8/23 second quarter report was the price trigger- phenomenal sales up 746 % and net profit up 221 % from previous acceptable levels.

Last year there were less than a dozen producing wells and now over 110 wells with projections of doubling . The production in four Chinese fields is over 1600 barrels a day with operating margins at 49% - a lot of cash is dropping to the bottom line. The company has a long term guarantee for 100% purchase of it's output to Petro China, which is a big player in China. There is no doubt that China is starving for more local and foreign sources of energy, especially oil and gas. US and Russia are not anxious to help China grow- no problem with demand here!

Some other positives are: experienced management hired from China's big oil cmpanies, great financials that are riveting, well controlled expense and debt while expanding rapidly, low number of shares at 19 million with only a float of 3 million, and forward PE approaching 2. The marginal current ratio of assets to liabilities is not uncommon with typical high Chinese account receivables. However the cash flow from operations of 49% is adequate protection. Reserves are increasing but the life of these fields may not be world class producers. The reports to the SEC are professional and clear of suspicious accounting or problems. Sustaining growth is a challenge that it appears that CNEH's management has well planned for.

My inclination is to confirm the sustainability of the fast increase in share price before adding shares. I'm encouraged by the fact that small capitalized Chinese stocks on average have held up well in the poor market of the past weeks. Although some have referred to CHEN as the Chinese EXXON (XOM), there is much US investor trepidation regarding ownership of Chinese stocks, even those listed here.

Comments

[max petrisek]

Stock @ 3.18 is nearly 3 times it's price when the article was posted. Glad to attemot to answer qustions on this winner !

[max petrisek]

This ipost is to look at the negatives of CNEH. Other than the cliche of "too far to fast" (About up 6 fold in ~ a week) there are items one can ponder. PE of 26 is high for an energy company even in China, The consistency and reliability of predictions or guidance of many small cap Chinese companies varies drastically, This is a 58 million cap with a low float of 4 million. There are many entwined arrangements with others Cos. including the dominance of the government in fixing prices and control over many company business decisions. One would be fair to say it is difficult for most Americans to understand or accept the Communist/socialist form of government. At least it doesn't help visibility for American eyes. Volatility as a change of .5 to a peak of 3.5 in about a week may be scary or an opportunity but it adds to difficult investing decisions. Some of the matrix for energy stocks as reserves, depletion rate etc are not clear to me. So I'm still impressed and overall positive but I have not bought into the powerful up move. It is not my intent or ability to make a future call mostly because it is a small cap Chinese volatile stock. I would only add to the confusion to relay what the open message boards are forcasting. Any additional comments by myself will be limited as this site does not get many that comment on these articles.

[max petrisek]

Today CNEH was at $3.80 which is a triple digit gain in past few weeks. dou

[max petrisek]

Since I now own CNEH I've done a lot more DD which are mostly positive to this now biased shareholder. More verbiage here seems useless as the original article did not appear to stir interest here. However the price movement to the $4.3 & 4.4 range has significantly increased the trading volume to near a million shares / day which is great for a low float of 3 to 4 million shares. The price is breaking all time highs. The CEO owns 35% of the shares. Oil prices are rising and so are my convictions of future valuation.

[TS]

Max, I found it very interesting. There is very little information out there on this company and I just discovered it and had similar trepidation over the chart. But you may be on to a winner here and it takes that kind of gut check after due diligence to buy after such a super spike in share price. But if they play ball with accounting practices and SEC filings it looks like it could be very substantive. I'm looking for any websites for the company in English. Did you find anything? Also, have you been able to locate specific people to talk to directly in your research? Thanks. Good Work. TS

[max petrisek]

As to researching CNEH, it is like all smaller Cos. - Less info. Regarding talking directly to others- No not directly. However the Investor Village message board is better than Yahoo for a give and take stock board. You can do private messaging on IV board. Soon Agoracom site will have a better exchange but not all stocks are covered. When one gets off the major exchanges, info is of less quantity, quality and reliability. If this is true, then the messsage board statements have wilder or less accurate statements. So some say why take this added risk- it is just a risk reward decision.

[max petrisek]

With CHNG on 10/05 at an all time high of about 8.46 it is time to wrap-up this story for now. I'm closing the book with the same enthusiasm as I had when several months ago it hit 1.7, a new high. Yes I will continue to hold shares. Selling at an optimum time is the toughest investment decision. Good luck an thanks CHNG!

[max petrisek]

Right story wrong ploace.

[max petrisek]

For most the visibility or frequent PR is minimal for this type of stock. Yet having said that, there was a very favorable preliminary 3Q report. The year over year growth in hundreds % . More important was the favorable guidance by the Co. both on expanding the number of wells and the increased efficiency of extracting through newer high technology methods. Better extraction should drop to the bottom line as well as improve depletion or reserves. The stock got about a 252% boost to $4.55 then gave up most of that in a few days. Much Investor Village board chatter is about pros and cons of the needed and ongoing financing. The consensus opinion when the financing is concluded the stock will run-up. Maybe so but the 3rd Q report is sure to give the stock favorable support. I am heavly weighted in this stock and find little significant negatives. The present price of oil continues to be a positive and the Chinese needs for energy are tremendous. Chinese Gov. is not bashful about their energy needs and has been supportive of locals including tax reduction and processing of approvals for expansion where involved. PTR the buyer of CHEN's oil is a mamouth Chinese Co. that has had stock appreciations well over 100% yearly with revenues and profits to support the stock valuation. One should be aware of the low float of ~ 3m.

[max petrisek]

My positive evaluation remain high as previous very positive comment and my opinion is steadily improving . These many positives need no further detailing as the top management group continues to meet optimistic guidance. A few normal drawbacks usually occur when a stock rises about 800% since Aug '07 and that is stock valuation. From a high of 4.4 to recent trading of 3.0 to 3.7 is disconcerting to many. Those that profited also ponder how much profits to take off the table. My conclusion is that short term guessing is not helpful but realistic gains can & will continue for the longer term of months or a year. Yes I am holding and will add on any dips below 3.0. The overall market weakness & concern of greater risk for a leaky bubble in China are possibilities. The odds greatly favor this great outlook will continue to reward the shareholders.

[Dr Sven]

I think this company has a great future ahead, especially after the recent financing.

[User 163394]

I have a few thousand shares. Here is an excellent report:

seekingalpha.com/artic...

[max petrisek]

An update and + & minuses for CNEH. Since my original posting (Sept'07) Chinese stocks and CNEH on average have boomed and then corrected about 30 to 40 %. Many Chinese stocks corrected 50 to 80% since Oct.'07. CNEH went to a high of $4.55 to a low a month ago of about $1.68. Yesterday the stock hit a high of $3.2 so this is drastic numbers. Where to now- As a shareholder I'm convinced its up, I have held since 9'07.. The Q reports are all outstanding, successful financing of about $30 million without much dilutions, adding new producing wells at near a 100/year thus more reserves & profits soaring with oil @ $114/bbl. The possible negatives of favorable oil prices is the old fact that PRC may alter pricing at will and kill the goose that is laying golden eggs. The energy situation( shortages) will cause Gov. intervention which may be worse than the present 40% tax on CNEH (due to high oil prices.) It's just the PRC unknown but if left alone CNEH with greater output, big cash flow will move up to closer to $10 than the 1.68 low of the past month. I believe the odds are greater than 5:1 that CNEH is on a up move AGAIN! Both Motley Fools and Seeking alpha have also issued realistic very positive predictions of the above. The TA is not the critical matrix it's fundamentals and PRC.

[Max Borne]

Looks interesting. But maybe too good to be true?

[97m6formula]

The only thing that has me not dumping everything i have into this is the "too good to be true" thought. I mean everything about it looks great I'm just afraid the something is going to happen out of their control. Maybe bad weather. or the govt. You know? I will still continue to put money into it though just not everything.

[max petrisek]

A lot has happened to CNEH since my last post in April '08. The big story is today's share price @ $4.67 has broken it's all time previous high of $4.55 with a high volume of 803,000. These are the likely fundamental reasons: the companies financials continue gaining at steady phenomenal rate - real growth. The company seems to be nearing a listing on a major US exchange (Have U heard this listing story before?) , management will do a USA conference presentation in July, they have a new reasonable website with a fantastic looking fact sheet, oil prices are up and they sell 100% to PTR at listed price on Shanghai exchange- no sales cost or account receivables (AC) and other positives as successful financing to drill 100 additional wells & acquisition of more reserves, etc. The company has 75,000,000bbl proven reserves. The management is experienced & supported by PTR who has a vested interest. Some here have said it all sounds too good to be true- that drives some crazy and others just take profits, or go with the flow? To myself the negatives always remain PRC decisions which can cut both ways and volatility of this class of stocks. Likely the PRC high excess oil tax may be reduced to encourage more desired domestic production??? My continual positive message remains even with the Chinese & US stock markets in a bear mode. Folks want to invest in a winner! About a week ago I doubled my exposure @ 3.95, so I've paced my bet. Other comments here about not putting everything into CNEH is certainly always valid. Just go to Yahoo, Google and the Investors Village (IV) message board for DD. 2 suggested outstanding posters on the IV board are Northern---, & Pappytom. I am biased positive until the fundamentals change negative and not dependent on technical analysis or short term corrections. I have been a holder for several years and haven't sold any for about a year.

[max petrisek]

My only reason for further comments about CNEH is that the stock is still "running" (up.) Today it hit a high of 5.68 with a close of 5.58. The continues spike in oil price of around $143 certainly adds up-ward pressure to CNEH. The over 1 M volume days has been cut to over 500K today and has reduced the rate of the sp rise. With my doing a lot of tracking of this stock one might expect it to be easy for me to make a good projection for future prices. I don't have that urge nor have I become rich from my 50 years of serious investing. I have an invested average value near $3/share so why not take profits if not on all shares just take some off the table. If I owned shares in the 100s of thousands that is what I would do- a no brain-er? But that is not my case as I have reduced my overall investment commitments with age. Having seen a high % of small Chinese stocks run up and then falter badly gives many folks a reason for taking profits. I'm a believer in this stocks long term future as it's tied to the price of oil - so I'm letting it run.

[max petrisek]

Me again- CNEH is still doing well at 4.97. Another competent investor has excellent remarks on CNEH here on SA and the IV aboard. It is Nawaralsaadi. He is heavily invested in CNEH and rightly states: "all CNEH needs is time!" Many other posters are getting aboard and many are estatic about the fundamentals and are ignoring the little short term wiggling of share price. High oil prices and fantastic outlook is the order of the day. We are anxiously awaiting CNEH's move to a big board and more news. The odds are getting better!

[max petrisek]

This stock is really hanging in- What's that? - Just better than most O& G companies. For those that would like to ask questions directly there are 2 good sources: 1.Bill Zima at the information company ICR -see news items for link. 2nd. email management > [e-mail] < . Some are calling the CFO whis ph # iws on the CNEH web site. I have found that athese are good sources for information.

[jimbonano]

What is the main factor the more people have not seen this stock on their radar? I mean, with all the noise about energy and the seemingly good health of this company - what is that 'one' factor?

[jimbonano]

With all the noise regarding energy these days and the seemingly good health of CNEH, what is the 'one' big stopper that is keeping this stock's PPS under performing?

It certainly has not flown under the radar screens of energy stock watchers....!