“Profit from China’s Epic Hunt for Oil” Robert Hsu

Robert Hsu has been sending out several teasers related to Chinese oil demand lately, no big surprise as we watch oil toy with $140 a barrel (should we even pay attention to $10 moves anymore? Boooorrring …)

In his words, “China’s hunt for oil is one of the most extraordinary, untold stories of our time. It also offers one of the greatest investment opportunities for investors today.”

And … “China’s epic hunt for oil doesn’t need much explaining but I’ll state the reason, bluntly: without oil, China’s economy goes back to the Stone Age, fast. And the ensuing civil strife across China would make the Mongolian Hordes look like a Sunday school picnic.”

He paints a nice picture, eh?

And for Asia Edge subscribers, he’s been pushing lots of companies that are essentially profiting from the rising price in oil that has come, in some part, from rising Chinese demand. It’s a slightly indirect play in some ways, but he has had a few interesting picks because of it — most recently, Atwood Oceanics and Petrobras. (Yes, for those of you who are paying close attention, I’m admitting that I guessed wrong on his driller when I wrote about that one a week ago — it’s Atwood, not Pride … but at least I told you I was guessing in the first place! And I still think you can’t really go wrong with any deepwater driller, though ATW is not the one I’d pick, and i guess it’s more accurate to say that it’s also not the one I have picked).

Hsu throws some nice “color” in for us, too:

“From the desolate steppes of Russia to the fetid jungle of the Congo, from the abyss of the deepest Atlantic trenches to the tar sands of Canada, China is providing the technology, China is providing the money to find new oil.”

And he describes how China got involved in the Canadian tar sands/oil sands/bitumen projects in Alberta …

“One tar sands outfit needed help with another project. Truck loads of Chinese workers appear one morning and the problem is dealt with … Then a new technology for extracting heavy oil was suggested by the CNOOC folks. It’s called Toe to Heal Air Injection, it has been used successfully in China and, used locally on the tar sands, it released a veritable Spindletop of oil!

“Using this method, 110,000 barrels a day of heavy oil are already being pumped from one project. Soon, this will be 500,000 barrels a day!

“Reserves for the project are now estimated at 8 billion barrels. That’s 40 years’ worth of oil from one project … At a cost of $10 a barrel.”

It’s actually called “Toe to Heel Air Injection” and abbreviated THAI … but you get the idea.

So Hsu is recommending that folks buy into the Canadian oil sands “phenomenon” — but not that they buy a Chinese oil company (not for this reason, at least, though he has recommended at least one of them before).

“… for today, get into the Canadian tar sands company that’s benefiting most from China’s close involvement.

“This stock’s been a Sleeper but the new find and new technology puts it on the map. In the first quarter of 2008, earning soared 170%, revenue shot up 27%. That got everyone’s attention.

“The second quarter earnings report is now being prepared and I want you in the stock at TODAY’S bargain prices—before it goes ballistic.

“Recently, this was a $57 stock. Soon it will be a $157 stock.

“Recently, this was a $1 million company. Soon it will be a $100 billion company.”

So … Thinkolator at the ready, what can we deduce?

The stock is almost certainly Canadian Natural Resources (CNQ, trades in the good ‘ol U.S. of A — also in Toronto, with the same ticker)

They did have earnings growth of exactly 170% last quarter (announced about a month ago), and the shares were at $57 not too long ago, though it was only for a few minutes (on January 23). The shares are right around $100 now, and have been bouncing around that price for a month or so but have had a truly remarkable run over several years.

And the big project in question — their Horizon project — does indeed have projected production of 110,000 barrels per day starting in the third quarter of this year (so that would be now, I guess, or soon), and they have said that they will expand this production to 500,000 barrels a day “in due course.” Can you picture an American company saying that they would expand “in due course?” No, too classy — but as I read it that’s classy Canada-speak for “maybe someday.”

I’m not sure exactly how the Toe to Heel Air Injection (THAI) stuff comes into play with this one — as far as I can tell, Horizon is an open-pit oil sands project, not unlike the big ones from Suncor or others. It’s certainly possible that they’re trying THAI, too, though if so they’re hopefully licensing the technology from Petrobank, a previous Gumshoe-sleuthed company that owns this technology. I Don’t know if the Chinese are paying royalties or not to Petrobank or if Petrobank claims to own the technology worldwide … seems a bit unlikely, but one never knows.

Market cap is about $55 billion — it’s been a loooong time since it had a market cap of $1 million, if ever … even if this is just an error and they meant $1 billion, it’s been many years since they saw that price. Thankfully for Robert Hsu, editorial license allows you to mean whatever you want when you say, “recently.” Or maybe he meant sales of $1 million, which would still have been quite a while ago.

CNQ, by the way, is much more than just an oil sands play — they are an interesting company well on their way to being an oil major, or so it appears from a quick glance. They also have offshore production and exploration in Africa, and lots of natural gas and conventional oil reserves. They’re not cheap compared to other big oil companies, but they are certainly less expensive than other companies that have similarly huge reserves potential (CNQ also has a lot of totally undeveloped land in Alberta, apparently). So they have real earnings, some nice revenue diversity, and significant growth potential, but probably aren’t bargain-basement priced at the moment.

Chinese oil companies are certainly tight with many of their Canadian counterparts, as well as with oil companies and service providers around the world — they’ve got deals with Husky and other drillers to work onshore and offshore China, and CNOOC is trying to buy Talisman, among many other relationships.

If you’d like to look into CNQ in more detail, here are a few places ot get started:
Their last earnings transcript, and the earnings press release,

a Seeking Alpha article that cribs most of a Matt Badiali report on CNQ, and

some positive comments in a Forbes article.

Enjoy!

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

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Stock Gumshoe Update — Winners and Losers

1. Are you sure this is not Petrobank (PBG)? They invented THAI and will make a fortune in licensing it to other companies.

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   StockGumshoe Reply:
   June 25th, 2008 at 10:43 am

   My understanding is that they bought the THAI process, they didn’t invent it. But semantics aside, Hsu states that “In the first quarter of 2008, earning soared 170%, revenue shot up 27%.”

   That matches CNQ precisely … Petrobank is growing much, much faster than that as of their last quarter (revenue up 500% or so, net income up about 800%), though they’re starting from a much lower base.

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   Posted by Stocklord | June 25, 2008, 9:50 am

2. Last year, to my chagrin, I gumshoed my way to CNQ but let it off my radar. On their website it shows the THAI process as a method of air injection wells that stoke an underground fire that melts a wave of warm bitumen in front of the fire. A downstream series of extraction wells draw the previous tar, now a warm oil to the surface. The economy of the technology is that it can utilize a mininum of 40% upwards of 80%. You do not have to use mass quantities of expensive natural gas to separate the oil from the sand/water envelope make a dirty form of BTU’s. A large percent of the atmospheric emmissions are are captured in SITU (below the overpack or ground above it. In effect it uses the energy in the field to extract itself at a greater economy and at the same time captures the lions share of the emmisions that would otherwise go to atmosphere underground. At face value the likely leader in the field on a wide front.

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   Posted by Jerry | June 25, 2008, 10:22 am

3. Petrobank does have a licensing agreement with China and with several other countries.

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   Posted by Woman with Portfolio | June 25, 2008, 10:23 am

4. I believe that the THAI patented process is the IP of Petrobank (PBG on Toronto) and they have a $40 million demonstration plant (Whitesands Project). They also have another IP called CAPRI where they line the well casing with a catalyst which reduces the oil viscosity on the way up to the surface.
   Petrobank has a couple of other things going for it. It is in the Baaken area where its horizontal drilling expertise will come in handy and it has a subsiduary (76.5% owned – rest owned by Columbian government, I believe) in Columbia. called Petrominerales (PMG on Toronto).
   I think the THAI process is the ultimate way to harvest the tar sands if the conditions are right and it has many advantages including lower capital costs (unlike Syncrude and Suncor), environmentally friendly (doesn’t waste natural gas like SAGD, doesn’t require water like SAGD), has a very small footprint on the surface, has a short time to production, and actually produces water that is clean enough for other processes.
   Is your selection of CNQ correct? CNQ seems to be way to big for the teases.

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   StockGumshoe Reply:
   June 25th, 2008 at 10:40 am

   THAI is owned by Petrobank, but they aren’t the only users — CNQ isn’t particularly big for a Hsu pick, he has chosen many larger companies in the past. I’d be shocked if I were wrong, given the exact matches on things like revenue growth, but I can’t ever promise to be more than 99% sure.

   This email teaser is definitely not for Petrobank, though that one also remains interesting for me (and I’ve written about it before), and if the THAI process takes off for CNQ and others I expect Petrobank should make some nice IP royalties.

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   Posted by stringman (Steve Woloshyn) | June 25, 2008, 10:25 am

5. Sorry to have to ask this! What is IP ?

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   StockGumshoe Reply:
   June 25th, 2008 at 11:50 am

   Sorry for the jargon, EYOUNG — by IP I meant Intellectual Property, in this case the THAI patents they own that could be licensed to other producers.

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   Mark Reply:
   June 25th, 2008 at 12:04 pm

   0.14.1.p: Sources of Capital: Royalty Financing – Encyclopedia … Intellectual property (IP) royalty financing is a viable alternative for some companies. IP royalty financing is nonrecourse debt financing. …
   vcexperts.com/vce/library/encyclopedia/documents_view.asp?document_id=1337 – 30k

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   Posted by EYOUNG | June 25, 2008, 11:31 am

6. Hi there,

   What a great site! Thank you for all your insights. I use Zecco and could not find PBG, but found PBEGF – is this the same? Petro looks interesting to me and wanted to do more research. Thank you!

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   StockGumshoe Reply:
   June 25th, 2008 at 1:56 pm

   Yes, PBEGF is the pink sheets symbol for Petrobank. I don’t think it’s an official ADR, but it will allow you to order shares of the same company if you prefer not to buy in Canada. Be careful, most services quote only the previous day’s “closing price” for pink sheets shares so you’ll have to look at the Toronto listing if you want a live (or near live) price quote.

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   Posted by DragonSeer | June 25, 2008, 12:35 pm

7. With PBG you need to add the .TO after their Canadian symbol DragonS..

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   Posted by SageNot | June 25, 2008, 12:52 pm

8. Stock is almost certainly Petrobank. Owned it at $4 and sold it at $16. Currently around $57, I was sure it was PBG as soon as I read the teaser.
   The THAI process could bring big royalties, but
   I like the lower market caps for my companies.

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   StockGumshoe Reply:
   June 25th, 2008 at 3:38 pm

   Wow, do people ever like Petrobank … again, I have no reason to dislike them, and I think they’re probably a more interesting stock to follow, but the specific clues (earnings growth, sales growth, production level) from the ad don’t come close to matching Petrobank. They do, however, exactly match CNQ’s first quarter numbers and their Horizon project. I won’t argue that they’re better, just that they’re the company being touted by Hsu’s Asia Edge ads at the moment.

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   A.Nony Mouse Reply:
   June 28th, 2008 at 12:54 pm

   STOCK TEASED (and included in AsiaPacific Edge portfolio) IS DEFINITELY NOT PETROBANK IT”S CNG

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   Posted by Jim Ilchyshn | June 25, 2008, 2:45 pm

9. Hsu’s pick IS CNG

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   StockGumshoe Reply:
   June 28th, 2008 at 12:52 pm

   Thanks for confirming, Mouse (it’s CNQ, though, I assume you had a typo)

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   Posted by A.Nony Mouse | June 28, 2008, 12:45 pm

10. Hsu has stated on his Asia Edge site that he does not favor pink sheet stocks.

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    StockGumshoe Reply:
    June 28th, 2008 at 12:53 pm

    I’ve seen that, too — most of the big newsletter guys don’t particularly like to pick pink sheet stocks, unless they are ADRs that trade on the pink sheets in large volume.

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    Posted by A.Nony Mouse | June 28, 2008, 12:47 pm

11. Yep it was a typo …Hsu’s portfolio stock & tease is CNQ

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    Posted by A.Nony Mouse | June 28, 2008, 3:02 pm

12. Speaking of Hsu…don’t know hw many of you caught his AsiaPacific Edge tele-conference on Tues. the 24th. I do know that he sent links to all of his newsletter subscribers including his weekly freebie. Here are his top five picks for the rest of 2008 in order:

    1. Mosaic (MOS)
    2. Atwood Oceanics (ATW)
    3. Petro Bras (PBR)
    4. Israel Cellcom (CEL)
    5. Sohu.com (SOHU)

    In answer to a question about which China stock he thought was a good long-term play. He said conditions in China change but as of right now he thought Mindray Medical (MR) was a stock he would be comfortable holding for the next 2 to 3 years.

    The reasons he gave for picking Atwood Oceanics instead of any other deep water driller was their involvement in the Asia Pacific Region, the fact that they were the only mid-cap deep ocean driller, and listed on the NYSE, and their growth prospects.

    [Reply]

    Posted by A.Nony Mouse | June 28, 2008, 10:09 pm