Chinese Companies Looking For Energy
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CNOOC (NYSE: CEO) has been granted U.S. approval for its purchase of Nexen (NYSE: NXY), a Canadian energy company. This is a big deal, not because of the ultimate price tag, but because it gives China a notable position in the Canadian Oil Sands region. Although Canada is looking to put limits on similar purchases, China will likely continue to aggressively buy oil and natural gas assets. It has little choice in the matter, and that could be a good thing for all oil companies.
A Big Country
China is a big country with lots of people. When most of those people were poor farmers, energy wasn't as big a deal. However, China has been industrializing at a fast pace. That requires energy of all sorts. Oil and natural gas are two key energy sources and ones that can be easily accessed. With more people entering the middle class, China is going to find its energy capacity strained if it doesn't act quickly to bulk up.
That's notable in the electricity field, where the country is aggressively building new power plants, using coal, nuclear, and natural gas as fuel. However, it is also building cars at a breakneck pace. Cars use gasoline, which comes from oil. Thus, the country is using its controlled companies to reach out into the world to find additional sources of the key fuels it will need to support its economic growth.
CNOOC is China’s largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world. It's main areas of operation include Bohai Bay, the Western South China Sea, the Eastern South China Sea, and the East China Sea. CNOOC essentially has an exclusive right to develop these offshore assets. The company also has operations in Africa, North America, South America, and Oceania.
Like many other key Chinese companies, CNOOC is effectively controlled by the Chinese government. In fact, part of its stated purpose is to ensure energy reserves for its home market. The recently approved purchase of Canada's Nexen supports that goal.
Nexen is an international oil and natural gas driller with operations in the UK North Sea, offshore West Africa, the Gulf of Mexico, and Western Canada. It has three principal businesses: conventional oil and gas, oil sands, and shale gas. In the conventional area, the company has land based facilities in Canada, Yemen, and Colombia. Offshore, it operates in the UK North Sea, Gulf of Mexico, and Atlantic Ocean. The company's shale gas plays are located in northeastern British Columbia and Canada, with development opportunities in Poland and Colombia. It also has operations in Canada's oil sands, where it operates the Long Lake facility.
CNOOC came in with an all-cash offer that was an over 60% premium to Nexen's price the day before the deal was announced. Clearly it was a generous offer from a company looking to solidify a foothold in the oil sands region, since CNOOC already had assets in many of Nexen's other markets.
Canada's oil sands are dirty and expensive to develop. That means that oil prices have to remain relatively high for companies to make money pulling oil from the play. Essentially, oil saturated sand is dug up and then has steam, water, or other chemicals spraying into it to release the oil. For Canada, the oil sands are a strategically important asset. It is so important that there are many large oil and gas companies already operating in the region.
While Canada approved the CNOOC deal, it is rethinking its willingness to continue to grant access to foreign countries. This makes complete sense, particularly when dealing with a Chinese company whose stated goal is to benefit China. That's far different than working with an Exxon Mobile. Clearly CNOOC's efforts could easily be at odds with both its own shareholders and, in the end, Canada. Note that the United States scuttled a deal between CNOOC and Unocal, which was eventually purchased by Chevron, because of the amount of control the Chinese government has in CNOOC.
Other Chinese Energy Giants to Watch
PetroChina (NYSE: PTR) is another major integrated oil company out of China. It is also effectively controlled by the Chinese government. While PetroChina's business is centered on China, its reach is, indeed, much further than that, as it, too, looks to secure energy resources for its home market. Operationally and financially, the company is roughly similar to most other major oil companies.
The outlook for the company hinges on the growth of the Chinese market, and it is set to benefit as energy demand continues to increase. With a yield in the 3% range, PetroChina isn't the highest yielding oil major around, but does yield more than a full percentage point more than CNOOC. The yield is also on par with the industry leaders and backed by the continued growth of the company's home market. Its international moves should be monitored as well.
Another company to watch is China Petroleum & Chemical Corp. (NYSE: SNP). More commonly known as Sinopec, it was “established” in mid 1998. Like CNOOC and PetroChina, China Petroleum is a major oil exploration company. However, it is also one of the largest chemicals and refining companies in the world, too, with a big distribution network (gas stations) within China.
Interestingly, like CNOOC, China Petroleum has also ventured into Canada to acquire oil and natural gas reserves. Notably, the company's 2011 purchase of Daylight Energy expanded its foothold in our northern neighbor. As with CNOOC and PetroChina, the company's goal is to serve its home market, with a motivated government backing its efforts.
Oil Prices Could Stay High
With two giant companies searching the world for oil and natural gas reserves, there will be plenty of willing sellers. Particularly if the price being paid is generous. China has lots of reserves floating around, much of which are in U.S. dollars. Unless it wants to just hold massive amounts of U.S. debt, it has to spend the dollars it has. Using its two oil majors to secure international reserves is a good place to start. And, if it can't find willing sellers in the United States and Canada, it will be more than happy to deal with nations with which U.S. companies either can't or won't work.
It has been a long time since oil was what historically has been considered cheap. With black gold increasingly hard to find, political strife in oil rich countries, and China upping its efforts to secure access to oil, there's a high likelihood that oil prices aren't going to plumb all time lows any time soon. That means continued profits for oil drillers. It also means that investors might want to watch the area closely, with a keen eye on CNOOC, PetroChina, and China Petroleum & Chemical Corp.
While high oil prices is a good thing for investors in the oil space, China's oil and natural gas aspirations may not be so good for the interests of the countries in which its companies purchase assets. There's only so much that can be done about that fact, but investors could benefit just the same.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!