Chinese Oil Companies: How To Play The Inevitable Energy Trend

 |  Includes: CEO, COP, CVX, PTR, SNP, XOM
by: Investment U

By Mike Kapsch

It's crazy to think that in just the last three years, China has become the world's second largest economy, the world's largest energy consumer, and the world's second largest oil consumer. A recent PriceWaterhouseCoopers report even estimates, "China could be the largest economy in the world as early as 2020…"

Whether it happens by then, I honestly don't know. But neither does anyone else. In fact, long-term estimates like these are almost never right. There's one thing you can count on, though. No matter when (or even if) China takes the number one spot in the global economy, it's going to require a great deal of energy either way.

And it's more important than ever investors take a close look at what's going on. Because, when it comes to energy, China is shaking up some very critical sectors like no one has seen before.

China's Big Advance on Western Oil

Last year, Exxon Mobil (NYSE: XOM) saw its total oil output drop 5%. For China's government-owned PetroChina (NYSE: PTR), this decline was all it needed to knock Exxon out of its top spot as the world's largest publicly traded oil producer. In March, PetroChina announced that it pumped 2.4 million barrels of oil per day. That's 100,000 more than Exxon. And unbelievably, it's just a 13-year-old company. For investors, this may be just the beginning of a new trend, too.

For example, China National Offshore Oil Corp. (NYSE: CEO), or 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. To help bolster growth, last week the company opened up China's first deep-sea drilling project in the South China Sea for business.

Then there's Sinopec Group (NYSE: SNP), China's second largest oil and gas producer. It just launched its first ever shale gas project and expects to churn out 6.5 billion cubic meters of shale gas for China by 2015. The Chinese oil company's production also continued to nudge up in 2011 by 0.4%.

On the other hand, like Exxon, other Western oil and gas giants have struggled, as well. ConocoPhillips (NYSE: COP) divested more than $20 billion in assets and investments since 2010 and further expects oil production to dip 4.3% in 2012. Chevron (NYSE: CVX) saw its oil production drop 4.7% so far this year. The list goes on.

So what is China doing differently that's allowing Chinese oil companies to gain the upper hand over its Western rivals? The answer: They're aggressively buying up foreign oil and gas companies and fields.

China Foreign M&A… Good or Bad for 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. - reached about $20 billion." Just a few years ago, the three top Chinese oil companies accounted for only a fraction of this number. However, investors should still be very cautious as they try to take advantage of China's increasing energy presence abroad.

The main reason is companies like Sinopec and PetroChina operate for the sole purpose of fulfilling the needs of China's government. Therefore, they're notorious for spending more than they need to for exploration, development, and buying up other companies. And this combination hardly ever translates well to making a profit.

For instance, over the past five years PetroChina's shares have jumped a measly 1%. Meanwhile, Sinopec's shares tanked 53%. That's not the kind of investment I like to make. Instead, think about Chinese oil companies that operate more independently, like CNOOC. In fact, it's often considered the most "western" of oil majors in China because it has a long history of working alongside with foreign competitors. Not surprisingly, CNOOC's shares have performed much better than its peers. Instead of falling or trading flat over the past five years, its shares have more than doubled in price. Not to mention, the Chinese oil company still has a solid divided yield of 3.4% and trades for merely seven times earnings. Just something to think about.

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