China's Move Towards Oil Independence and Three Stocks to Consider

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s no secret China imports oil, 4.35 million barrels a day to be exact.  And that’s down from a year ago.  It’s also no secret China would rather not be in this situation.  Over the years, The People’s Republic has been active in oil exploration and overseas acquisitions.  So far, production has not come close to matching consumption

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“Net imports” are keeping oil prices high worldwide and spelling “opportunity” for investors. So how do you capitalize on China’s growing demand for oil?  Carefully.  The Chinese government fully understands its vulnerability to oil imports and seeks controlling interests in domestic operations. The Chinese are also keen on expanding into worldwide markets.  Why else would China offer to pay $15 billion for Nexen (NYSE: NXY) when the company’s market cap was around $10-11 billion?  A great windfall for those who invested before the bid was announced, but also an example of the growing Chinese presence in the energy world.  Some speculate the Chinese bid for Nexen reflects a desire to obtain offshore oil drilling capabilities.  Time will tell if the Canadians approve of the purchase.

Today, China needs outside help exploring its offshore oil fields.  British Petroleum has engaged in exploration and development of Chinese oil and gas fields since the 1980’s.  For example, BP discovered the Yacheng 13-1 natural gas field, one of China’s largest.  BP also operates retail gasoline stations, is the only foreign company in the Chinese aviation fuel market and it develops and markets various chemicals and lubricants.  As an investment, BP presents a mixed picture.  It continues to suffer for the Gulf oil spill in 2010, never having returned to its pre-spill price of around $58/share. Recent earnings have disappointed.  On the other hand, BP has successfully started the Devenick natural gas field in the North Sea, supplying gas to Europe where prices are about three times higher than in the US.  BP is also a partner in a mega venture to export liquefied natural gas from Alaska.  Lastly, BP is paying a decent dividend of 4.5%.

Husky Energy (NASDAQOTH: HUSKF.PK) operates both oil and natural gas fields off the Chinese coast.  Their oil operations center on the Wenchang oil field in the South China Sea where they have a 40% stake. Husky also operates three major natural gas fields, also in the South China Sea, in conjunction with the China National Offshore Oil Company (NYSE: CEO).  Husky views these operations as a strong growth engine for the company.  Husky’s exploration adventures in the East China Sea have not been too rewarding.  As an investment,  Husky has traded in and around $30/share for the past three years.  During this time, it has steadily paid a quarterly dividend of 30 cents Canadian.  Both the stock and the dividend were higher in years prior to 2009.  It would take some really good news for me to invest.

One interesting player is AECOM (NYSE: ACM).  This engineering company supplies know-how and support services to all segments of the oil and gas industry.  This includes offshore drilling, oil and gas transportation to onshore refineries, environmental impact and remediation, refining operations and even marketing.  ACM enjoys a significant presence in China beyond energy.  Transportation and infrastructure projects and a waterfront development plan have boosted ACM’s business and profits in The People’s Republic.  As an investment, ACM is coming off a disappointing summer with a downward earnings forecast.  On a more positive note, its recent earnings report beat expectations.  A stock buy-back plan was announced and the stock has bounced back from its summer lows. 

What about Chinese companies such as CNOOC, PetroChina or Sinopec?  Frankly, I’d avoid them.  Many of these companies receive substantial support from the Chinese government.  I suspect these companies are beholden more to their government’s interests than to those of foreign shareholders.  Further, China employs price controls on both natural gas and oil and these controls can hinder earnings.  For example, the US Energy Information Administration reports price controls have significantly hurt oil refinery profits, particularly those of smaller operations.

Investing in oil production companies operating in China carries some particular risks.  For a foreign company to develop oil or gas fields, a Chinese national company must have a majority stake.  The USEIA implies that once development costs are recovered, the Chinese company may take over operations.  While there is great opportunity in Chinese oil development, given the influence of the Chinese government, perhaps it is safest to invest in a support company like ACM.


dylan588 has a position in BP. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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