“New Chinese ‘Oil Colony’ Discovered” — So, What is it?

Revealing the stock to profit from China's "occupied territory" from New Growth Investor

This email started churning through the Gumshoe floodgates recently, a tease for Zachary Scheidt’s New Growth Investor, which we last looked at a couple months ago — the marketing for this letter says that they look for “stocks with bright futures ahead or a company with a new product set for maximum gains.”

Which sounds like a very specific description, but could be broadly applied to almost any company. The last time we looked at this letter back in March, Scheidt was teasing us about the “elderly San Diego woman’s dying wish” that could “give you a lump payment of $4,000” — which was a mysteriously worded way to hint at Cargill selling it’s stake in Mosaic, and the possible profit for investors as a result. The stock didn’t get the juicy private bid that Scheidt intimated was possible by the end of April and it’s down a bit (though it’s still being teased much the same way as a “bonus” in the current ad), but that’s water under the bridge, eh? What’s he teasing today?

Well, the heart of the teaser letter, which actually comes from Blair Morse, a “Special Investigator” for Taipan who pulls out all the stops in describing the “cloak and dagger” behind China’s secret colony and the oil wealth they’re accumulating. Here’s a taste:

“From a ‘Covert Operative’ Inside Chinese ‘Occupied Territory’

“For the past two years, I’ve built up contacts in the ‘oil colony,’ both native and Chinese.

“Posing as an oil industry ‘insider,’ I’ve gained their trust and embedded myself unnoticed in the community.

“I don’t work for the CIA or the U.S. military. In fact, I’m not affiliated with any governmental organization.

“I’m an investigator who specializes in the financial research industry. I was actually contracted by a private research company to share the full details on this incredible situation.

“In fact, I just hopped on a plane and hand-delivered this potentially profitable information to my U.S. contact, a trusted friend — and former whiz-kid hedge fund manager.

“He’s the only one with access to my research.

“Why would I deliver it myself?

“Because although this region is not fully controlled by the Chinese, I wouldn’t be surprised if they monitored communication coming to and from the colony.

“The Chinese regularly spy on their own people inside their borders. Why wouldn’t they apply the same paranoia to their ‘colony’ abroad?”

Exciting, huh? Well, I thought so too when I first read it … though the more I read, the sillier I felt. There is a US-listed company being teased in the thick of this goofy chatter about the “Chinese oil colony,” though, so let’s get at a little more of the info and see who they’re pitching.

First, though, we have to figure out about what “oil colony” they’re pitching — we’re told that it’s thousands of miles from Beijing, but is it … Uganda? Namibia? Sudan? Eastern Europe? The mystery builds!

“China began taking a specific interest in a 525,000-square-mile portion of this ‘colony’ over seven years ago.

“It wasn’t just that the area was free from the political turmoil of the Middle East. Early geologists’ reports suggested there was nearly as much oil there as in Saudi Arabia — over 100 billion barrels.

“A few other countries, including the U.S., were aware of the potential cornucopia of oil there.

“But, distracted by two wars in Iraq and Afghanistan, and with our oil industry hijacked by environmental do-gooders, we didn’t act.

“Instead, the Chinese seized the opportunity, pouring billions of dollars into the area and ingratiating themselves with locals.”

And we get some hints about some of the past deals the Chinese have made in this “oil colony” …

“… at least five different projects where China has poured in millions of dollars for future oil riches. The biggest include:

“Sinopec put $4.65 billion in the colony’s largest oil field, and another $105 million in a smaller, though potentially lucrative field.

“Petro China spent over $1.9 billion for two other massive oil fields.

“And the locals wholly encouraged these investments.”

But, we’re told, this “oil colony” is landlocked! They can’t get the oil out to China — what to do?

“The Chinese have been slowly putting together plans to build a 725-mile pipeline across the colony to a seaport.

“From there, oil will be loaded on ships bound for China. At first, China expects to ship 525,000 barrels of oil a day from the colony.

“But, as infrastructure continues to improve, that number will get even higher.

“My sources tell me the Chinese pipeline won’t be complete until 2016…

“With China’s oil supply desperately low on the home front, they can no longer afford to wait that long. So they’ve come up with an alternative plan to speed deliveries.

“Sources inside the colony report that the Chinese hope to start delivering oil to the sea using existing rail lines.”

And apparently more deals to export this oil may be in the offing:

“Richard Choi, a ‘colonial representative’ in China said a ‘significant’ deal could be announced very soon.”

Well, dang. Wondering why I was feeling silly about getting excited to track down this new “Chinese oil colony?” It’s because all along Blair Morse has been teasing … wait for it … Canada. Yes, our neighbors to the north, and by far our largest supplier of imported oil (second place, in case you’re curious, fluctuates a bit … but lately is close to a four-way tie between Mexico, Venezuela, Saudi Arabia and Nigeria).

OK, probably not just Canada, I suppose, but the “land locked” provinces of Alberta and Saskatchewan, home to most of the heavy oil riches of that country. And yes, it’s this heavy oil, oil sands, tar sands or bitumen (all different terms for the same basic kind of thing) that China is after in central Canada. And yes, arguments over pipelines to the Pacific from Alberta continue — the one I keep hearing about is the proposed Enbridge pipeline, which they’re calling the Northern Gateway, intended to send crude oil westward from Edmonton to the port/terminal at Kitimat (and gas/condensate the other direction — the oil sands producers apparently use natural gas liquids to refine bitumen). If you’re keeping track of the teaser “clues,” then this pipeline would be almost exactly 725 miles.

We’ve been teased about oil sands companies so many times I feel like I’ve practically been there — it wasn’t long ago that Brian Hicks was pitching the “revolution” that would come thanks to his favorite pioneer in SAGD in Alberta, and whenever oil prices are climbing the interest in this huge, politically friendly and environmentally disputed oil reserve drives yet more newsletter writers to grab for their thesauri.

And yes, Richard Choi is a “colonial representative,” I suppose — he’s a trade rep for the province of Saskatchewan in Shanghai, and he apparently told reporters back in January that a deal between Saskatchewan and China, perhaps on transporting crude oil by rail, could come by May. And in case you hadn’t noticed, it’s May now, so perhaps that’s the reasoning behind the tease — hope for a little spike if there’s some substantial news.

So … which company?

“You see, the Chinese don’t have the technology to produce all of this oil themselves.

“Like so many other projects, the Chinese need outside expertise to complete the work. Their ‘oil colony’ is no different.

“A few non-Chinese oil companies are operating in the “colony,” in partnership with the Chinese, of course.

“They aren’t American companies, but one of them is listed on the New York Stock Exchange.

“If you buy shares of this company now, I firmly believe you could double your money when the deliveries start.”

OK, so there are dozens of companies working in the oil sands, and a lot of them, particularly the larger ones, have listings in NY. We need more clues — just saying “in partnership with the Chinese” probably isn’t enough.

Most of the large oil sands players look pretty cheap at the moment — Canadian Natural Resources (CNQ), giant Suncor (SU), even Brian Hicks’ teased Cenovus, they generally trade at reasonable near-market forward PE valuations even though oil prices are in the $100 range … but then again, almost every large oil company in the world trades at a discount to the overall market right now. Imperial Oil (IMO) is maybe a little more expensive but is also growing quickly, with some fairly large new projects, and Canadian Oil Sands (COS in Toronto, COSWF on the pinks), the former high-yield trust in that space, is often mentioned but, unlike the others, doesn’t have a NY listing, and if you’re looking at the non-NY-listed large Canadian players, there’s also MEG Energy (MEG in Toronto, MEGEF on the pink sheets) and Athabasca Oil Sands Corp (ATH in Toronto, ATHOF on the pinks).

So which one is it? Well, if they’re going to cut out the clues at this point, there ain’t enough to properly fuel up the Thinkolator — so I guess I’m going to have to guess. There are several large oil companies in Canada that have Chinese connections and Chinese partnerships or ownership and a NY listing, including former trust Penn West Petroleum (PWE), which sold 45% of its Peace River oil sands project to a Chinese sovereign wealth fund about a year ago, along with most of those mentioned above. Cenovus would apparently like to have a deal with the Chinese if it helped them to monetize what they think are their undervalued Alberta properties, but I don’t think they have a deal yet.

There are also plenty of smaller players in the oil sands — little Oilsands Quest (BQI) actually has a NY listing and a large tract of land on the Saskatchewan side, though it has been a bitter disappointment for investors for years, and even teensier Strata Oil and Gas (SOIGF on the pinks) has gotten a bit of teaser attention from time to time, along with what I’m sure must be a host of “juniors” who I’ve never heard of. But this particular tease seems pointed squarely at one of the larger players who has technology or properties that are partnered with — or will soon be partnered with — the deep-pocketed Chinese investment and oil companies.

Which leads me to wild guess time — so I’ll flip my three-sided coin and throw out Imperial Oil (IMO in both NY and Toronto), in part because it is a partner with the Chinese, in that both own pieces of the Syncrude project, and in part because to the best of my knowledge it is the large company that is most heavily levered to oil sands production for both current revenue and growth (with the possible exception of Suncor). Imperial trades at about 16X trailing earnings and about 14X forward earnings, so the analyst estimates are somewhat tempered compared to Canadian Natural Resources (CNQ) or Cenovus (CVE), each of which is expected to post much stronger earnings growth from 2011 into 2012 and both of which will probably also do quite well if we continue to see strong oil prices — so you can certainly argue that either of those two likely candidates has current catalysts, too, I just see Imperial as a little bit more directly driven by the oil sands.

Catalyst-wise, Cenovus is the company that appears to be most directly courting Chinese investment, they’d like to bring in a partner to help fund their newest oil sands projects, and they’re not shy about taking money from the group that’s got it’s wallet out, so if near-term catalysts on deals with China are the primary concern, Cenovus might be your stock — though if the “big deal” is just more export pathways to the Pacific, either via rail or pipe, that should be of fairly wide benefit to all the oil sands producers. It’s worth being somewhat cautious about that, too — after all, the world’s largest oil consumer and importer is still right next door to Canada, and is already served by pipeline from the oil sands, so it’s not like there’s some vast inventory of oil up there that can’t be exported at near market prices right now (syncrude is always sold at a discount, largely because it’s tougher to refine).

Will these guys, or one of the other oil sands players, make you rich in the years to come? Or even in the next 6-18 months, as Scheidt appears to believe? I don’t have any idea — there are certainly big efforts underway to increase production from the oil sands, and to increase exports, but both the Enbridge pipeline to the Pacific and the proposed Keystone XL pipeline to the US gulf coast are politically uncertain, particularly after a number of recent pipeline “incidents” that have people worried.

And though the Canadian government has been open to Chinese joint ventures and non-controlling stakes in many different oil sands projects, including the huge deal by Sinopec for a stake in the Syncrude project (that’s the $4.6 billion one mentioned in the teaser), they have also been cautious about letting these deals get much attention (the second-largest deal, PetroChina’s $1.9 billion purchase of two Athabasca Oil Sands Corp projects, was approved between Christmas and New Year’s when few were watching), or about letting the Chinese import guest workers. And with oil sands we have the recurring environmental concerns as well, I can’t picture a world that doesn’t develop these kinds of easily accessible, politically stable oil reserves, but I can certainly envision a world where that extraction becomes more heavily regulated or expensive, which would, of course, hit any of these companies — particularly if oil prices drop (at these prices, you’d think they ought to have the margins to handle almost anything).

So … can’t be definitive about which oil sands stock Scheidt will pick for you in this “oil colony,” but I can at least tell you that the “colony” is deepest, darkest Canada … and that the major, NY-listed oil sands stocks are all available for you to research as you like.

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10 Comments on "“New Chinese ‘Oil Colony’ Discovered” — So, What is it?"

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Patrick
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Patrick
May 9, 2011 4:25 pm

Any investment in oil sands extraction in Canada is like loaning money to the worst polluters on the planet… put your money into something that won't poison your home so badly.

Travis
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Travis
May 9, 2011 4:48 pm

How do you travel Patrick? by horseback? Wake up to the times man! And I'm guessing you don't have any money to invest? adding energy stocks like SU, And CNQ will help you outperfom the market. Guess what, people arn't perfect, could oil be replaced by electric vehicles, well yeah, but is it likely to happen right now. no not at all.
Betting against oil in the summertime is usually a very bad idea.

Brian
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Brian
May 9, 2011 5:23 pm

The odds of the Gateway pipeline to Kitimat being built are diminishing by the day. BC has a ban on tanker traffic down the west coast of BC., Ottawa has zero jurisdiction in the matter. The Tankers would have to access Kitimat and embark from same using the inland waterway. Both the the current BC Government and the opposition support the existing ban. The threat of of a spill jeopardising the second largest salmon fishery in the world is deemed to grat.

boband
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boband
May 9, 2011 7:14 pm

The finished product itself does not carry a discount, but the heavy crude that is most often exported does. Converting or upgrading the heavy crude from the oil sands to the lighter synthetic crude is currently done more at the destination than near the source. Hence the discount. And by adding alternate export markets some of this discount will be gone. As Brian said though…chances of the Gateway going ahead don't seem to high right now.

who noze
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who noze
May 10, 2011 9:07 am

not to forget dwog you you a russian nationalist put in 2llmillion bucks to buy in while a d member

SkepticScotsman
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SkepticScotsman
June 29, 2011 9:58 am
We hear so much about unintended consequences USA's deep and growing indebtedness to China; especially concerns that asymetrical creditor/debtor relationship has come to mean that China has strong influence on US policy, international/foreign policy….and domestic. Any chance China could leverage USA to allow a pipeline that would run from oil-rich "landlocked" Canadian provinces to a NW USA port; e.g., Seattle, Portland, or a new "environmental safety engineered" purpose-built port, at location where pipeline would reach US west coast? That would leave BC out of it; but OR and WA populations are every bit as Luddite as BC. Just a question.… Read more »
G-man
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G-man
May 9, 2011 5:51 pm

worse than BP??

Max
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Max
May 9, 2011 7:06 pm

Patrick — how did a dumbocrat like you get no this email list?

Oil sands extraction is likely the least polluting method of oil production — now that they no longer need water to do it and can recycle water when they do use it..

Mark
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Mark
May 9, 2011 7:42 pm

Hey Brian. What about tankers carrying coal? I own stock in a company that plans to ship coal from Ridley Coal Terminal in Prince Rupert, BC. Any problems that you know of with doing that? Thanks.

bonjovii
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bonjovii
May 10, 2011 4:48 am

Nice answer, you definetevely know nothing about tar sands..and then trying to insult wwith the word liberal…please take your head out of a*s and you will see better…now run along and do some research…your answer is about the intelligence of a neandarthal….one more thing go read Palin's and Bush's book, it's about the most your intellect can take..lol!

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