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

By Travis Johnson, Stock Gumshoe, June 24, 2008

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.

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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




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