Expect More Chinese Takeovers of Oil Companies
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There is a lot you can do with $3 trillion in foreign reserves, as China has banked.
One is to pay $15 billion for Nexen, a Canadian oil firm, as Cnooc Ltd (NYSE: CEO), a state-controlled oil and gas company from China, just did. As Beijing is sitting on, literally, trillions in export earnings and wants to expand its control of the world's energy resources, expect to see more takeover activity from Chinese oil companies, such as PetroChina (NYSE: PTR) and China Petroleum & Chemical Corp. (NYSE: SNP), in addition to Cnooc Ltd.
For a variety of factors, much of the world's energy sector is on sale. Earlier in the year, China Petroleum & Chemical moved to purchase the YPF SA (NYSE: YPF), an Argentine oil firm, and holdings from Repsol, a Spanish oil company. But the nationalization of YPF SA by the government of Argentina throttled that transaction.
However, this could someday put YPF SA on the radar screen of China for a major investment. Now trading around $12.90 a share, YPF SA is well beneath its 52-week high of $41.59. Eventually, the Government of Argentina will have to pursue positive interactions with the global community if it hopes to stay in power. After all, China opened up to capitalism after being a bitter Cold War ally, squaring off against the United States in Korea and Vietnam. Inviting in Chinese investment in its energy sector would be a welcome, and much needed, move by Buenos Aires.
Even Cuba has done this. Last year, China National Petroleum Corp signed a $4.5 billion agreement with Havana to upgrade the Cienfuegos refinery. Earlier in 2012, Three Gorges, another state-owned Chinese company, bought 20 percent of Energias de Portugal, a utility that is one of the biggest firms in Portugal.
When oil falls in price, companies become more attractive, as it is cheaper to buy than have to explore and find the crude. United States Oil (NYSEMKT: USO) the exchange traded fund for oil, is now trading around $33.20. That is off from the year peak of $42.30. United States Oil is up for the month due to tensions increasing again with Iran. However, the short float on United States Oil is staggeringly high at 43.25%. As a short float of 5% is considered to be troubling, there are obviously many investors betting that United States Oil will plunge along with the price of crude.
China's buy of Nexen is bullish for the price of oil, though. Last year, Cnooc Ltd bought Opti Canada, another Canadian oil entity, for $2.1 billion. That purchase valued the proven reserves of Opti Canada at $11 barrel. The deal for Nexen assesses the proven reserves at $17 a barrel. Oil is now trading around $88 a barrel.
Total spending by China's oil companies on overseas acquisitions has exploded in recent years. China is the world's biggest importer of oil, in addition to coal, and Beijing wants to secure more energy supplies. In 2008, less than $10 billion was spent by Chinese oil companies on foreign acquisitions. By 2010, that had topped $25 billion. Year to date in 2012 it is already over that mark.
There is plenty of capital available. Cnooc Ltd has a profit margin of 29.16% and more than $34 in cash per share. PetroChina has more than $8.50 in cash per share with a profit margin of 7.16%. China Petroleum & Chemical has a profit margin of 3.13% with $4.56 in cash per share on the books. By contrast, YPF SA has just $0.82 in cash for each share from a profit margin of 9.34%.
China is still growing and it is still selling more exports than it imports. For the second quarter of 2012, China just posted a 7.6% growth rate for its gross domestic product. For the month of June, the international trade surplus for China was $31.7 billion. Expect more of these billions to end up buying foreign oil companies.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. 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.